Colossal? Maybe. Essential? Yes.
Over the last 18 months, the recovery has gained strength with economic growth accelerating and unemployment falling sharply. However the context in which the Chancellor delivered his Autumn Statement speech yesterday was far less rosy. Borrowing from April to October this year was £64.1 billion, an increase of £3.7 billion compared with the same period last year. Productivity growth has remained in the doldrums and the promised land of strong real wage growth has failed to materialise.
A number of the policies announced by the Chancellor will help to boost productivity, a few could be damaging if poorly implemented and the rest are essentially irrelevant. In addition, what has now become clear, if it wasn’t already before, is that the credibility of the deficit reduction programme rests almost entirely on the willingness and ability of the next Government to make cuts in public spending which are even bigger than those carried out in this Parliament. It can be done and it must be done.
The state will get smaller and government consumption will see bigger reductions. Significant cuts in departmental spending have already been made but opinion polls consistently show that people have not seen a particular deterioration in the quality of public services. The IFS may describe the required cuts in the next Parliament as “colossal” but that does not mean they are impossible. A determined and creative approach to government spending which examines how services should be delivered is crucial.
Furthermore, the fact that so much of the remaining deficit is structural gives us two options. Either we raise taxes and accept a smaller economy and lower employment or we cut and reform public spending and accept a smaller government. Doing nothing and hoping the deficit will magically disappear is not an option.