PAINT THE BIG PICTURE, GEORGE – SOME RECOMMENDATIONS FOR THE AUTUMN STATEMENT
The Chancellor looks likely to miss his net debt target on unchanged policies. In a Centre For Policy Studies briefing note, published on Friday 30 November, Ryan Bourne and Tim Knox recommend that he sets out a clear path to reducing government spending to 38% of GDP.
Recommendations for debt and government spending:
- Our calculations suggest that debt in 2015/16 will be between £20-30 billion higher than the amount necessary for debt to be on a downward path by the end of that financial year.
- In the Autumn Statement, the Government should acknowledge that further spending restraint is going to be necessary. It should not, however, react to any failure to meet the debt rule with rash, ill-thought-through spending or tax announcements, or accounting tricks to conceal it.
- Instead, the Chancellor should set out the necessity for and scope of the next Spending Review, which should set out a path to reducing the spending-to-GDP ratio to 38% within four years (the average tax-to-GDP ratio since 2000/01).
- This should include a thorough review of eligibility for government transfers, both for working age and retirement benefits, and education and health services.
Recommendations for immediate spending restraint, if necessary: The simplest way for the Chancellor to save money in the shorter-term is to implement cash freezes to several spending streams. For example, given the large increases last year, the Chancellor could freeze all benefits which would usually be increased by the September CPI inflation rate for one year, except for the state pension. He could freeze spending on aid, and abandon the 0.7% of GDP target which has no economic rationale. Finally, the Chancellor should set a clear framework and guidelines for how pay freezes should work in the public sector, given many departments have interpreted the existing freeze very differently.
Recommendations for the tax system: the Chancellor was right to recently state that the tax burden should not be added to. As such he should avoid introducing new punitive wealth taxes or council tax bands. There is scope, however, to embark on a revenue neutral tax reform programme according to the principles of broadening bases and lowering marginal rates, starting with the full merging of income tax and employees’ National Insurance into a single income tax rate (with employers’ National Insurance replaced with a simple payroll tax). He should also reduce the main rate of Capital Gains Tax, as previous CPS research showed this is now above the revenue maximising level. Finally, he should begin reforming the higher rate pension tax relief system, in line with Michael Johnson’s recent recommendations.
Recommendations for the supply-side of the economy: the Chancellor should abandon the unilateral carbon price floor planned for 2013, go further in deregulating small businesses and employment law, roll out a framework for ‘sunset clauses’ for new regulations, put forward a new Consolidated Act which rationalises all the 100+ Statutes that impact on planning and development and, in line with Nick Clegg’s recent speech, lay out a framework for new Garden City developments.
Ryan Bourne, Head of Economic Research at the Centre for Policy Studies said:
“What’s become clear since the 2010 Emergency Budget and Comprehensive Spending Review is that assumptions about the potential underlying growth of the economy and the strength of tax revenues have been over-optimistic. It is now likely the Government will miss its net debt target on unchanged policies. The particular rule in itself is relatively unimportant. What really matters is that the Coalition remains committed to getting our debt burden on a downward path. In the short term, spending on benefits, aid and public sector pay can all be frozen. But it’s increasingly obvious that a further spending review is necessary, and this should go further in looking at the scope of government activity, including eligibility for government transfers. The coming demographic squeeze makes this all the more pressing.”
Tim Knox, Director of the Centre for Policy Studies said:
“The Chancellor has a choice: will he put the long-term economic health of the country above the temptations of short-term political gain? If he tweaks the numbers to meet his rules and if he announces a wide range of policy initiatives which might grab a few headlines, then we will know that this is a Statement inspired more by politics than economics. What would be preferable is the recognition that the current fiscal pressures and long-term demographic trends require a great reduction in government activity and coherent simplification of our dysfunctional tax system.”
The full briefing note can be downloaded from here.
1. The authors of this briefing note are Tim Knox, Director of the Centre for Policy Studies and Ryan Bourne, Head of Economic Research at the Centre for Policy Studies. The note draws on research done by the CPS over a 2 year period.
Date Added: Wednesday 28th November 2012