1. Plan A is dead. In 2010, George Osborne promised to eliminate the structural current deficit within five years; and get net debt falling by the end of the Parliament. His plan was, however, reliant on unrealistic assumptions about a return to economic strength and healthy tax revenues, which have duly underperformed expectations. Faced with the choice of either cutting expenditure to close the deficit or more borrowing, the Coalition has opted consistently to slow the rate of deficit reduction. It has now abandoned the net debt rule altogether. There is no “deficit reduction plan”.
2. Despite falling over the first two years of this Parliament, the deficit is now rising again. In the year to December 2012, the current budget was in deficit by £103 billion (about £4,000 per household), £12 billion higher than it was in December 2011 for the previous 12 months.
3. Over £600bn (about £25,000 per household) will be added to public sector net debt over the course of this Parliament. Gross debt is forecast to be almost 100 per cent of GDP by 2015-16. Yet public awareness of the true state of the national finances is worrying low: 47% of respondents to a ComRes poll for the CPS last year thought that the debt will fall by £600bn over the course of the Parliament.
4. Planned spending cuts will reduce total government expenditure in real terms by just 3 per cent over the course of this Parliament, compared to a 62 per cent rise under New Labour. While ring-fencing and increased debt interest payments mean certain areas will see substantial cuts, it is wrong to say that the overall level of cuts is anything but mild.
5. The bulk of the fiscal consolidation has come from front-loaded tax rises and investment cuts, not expenditure cuts: just under 80% of planned tax rises (VAT, Capital Gains Tax and various other duties) set since March 2008 will have been implemented; 67% of the planned cuts to investment spending will have been realised; but only 32% of the benefit cuts and 21% of the cuts to other government current spending will have been achieved. There is strong economic evidence to suggest that cutting ordinary government expenditure is the least harmful way to cut deficits and has the most beneficial medium-term growth effects.
6. There has been no shortage of “stimulus”. On top of the £500bn + of deficit spending so far, we have had the lowest interest rates ever and above-target inflation. In addition, with £375 billion of QE to date (about £16,000 per household), the UK has had a more aggressive monetary policy than the other major currency areas. In the Eurozone, asset purchases are equivalent to 4% of GDP; in the US, they are equivalent to 14% of GDP; in the UK, they are equivalent to 26% of GDP.
A question: Albert Einstein is said to have defined insanity as “doing the same thing over and over again and expecting different results”. Why do many assume one more heave on a stimulus lever will propel us into self-sustaining prosperity? At best these policies are painkillers with side effects, not long-term cures.
To see what could be done to improve the medium-term growth rate, and for source details of the above data, see:
- Ryan Bourne and Tim Knox, Take the Long View: steps to improve productivity and growth
- Ewen Stewart, Masking the Symptoms: why QE and huge deficits are not the cure
Date Added: Wednesday 20th March 2013