The Grey Blur
14th May 2010, 18:10
Pain of deficit reduction is still hidden
By Chris Giles, Economics Editor
Published: May 12 2010 21:06 | Last updated: May 12 2010 21:06
“Deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain,” states the coalition agreement (http://media.ft.com/cms/eb8fec98-5dca-11df-b4fc-00144feab49a.pdf)between the Conservative party and the Liberal Democrats. If so, the rest of the document does not live up to the billing. Compared with budget plans the government has inherited from its Labour predecessor, the agreement included no specific new spending cuts, lots of public spending pledges, copious tax cuts and a commitment to faster deficit reduction. Unless there are huge spending cuts or tax increases planned but not yet announced, far from contracting, the deficit is about to deepen. It is not that the Conservatives and Liberal Democrats are deliberately misleading the public by saying they want “a significantly accelerated reduction in the structural deficit”. Rather, their plans for specific – and uncontentious – spending increases and tax cuts are well defined, while the broader objective of large net spending cuts and tax increases remains cloaked in secrecy
Day one for George Osborne consisted of phone calls to foreign finance ministers and British business groups. The chancellor also rammed home to officials, who clapped him into the building, the importance of David Laws, a Liberal Democrat and chief secretary to the Treasury. This was intended to send a message: that the coalition is real and Mr Laws is locked into the deficit reduction plan, Treasury insiders said. But Treasury officials, whose job it is “to speak truth to power”, did not say whether the induction of Mr Osborne and Mr Laws had included an outline of the full implications of the government’s aim to reduce the budget deficit faster – at the same time as offering new spending pledges and tax cuts.
First, the Treasury’s existing plans for public spending already imply cuts to government departments of £37bn (2.5 per cent of national income) a year by 2013-14. Added to this, the coalition agreement has committed the parties to increases in spending on overseas aid with an annual cost of £4bn; fresh income tax cuts with a price tag of about £5bn, as a downpayment on the Lib Dem plan to raise income tax thresholds; £3bn a year for avoiding some Labour tax increases; faster deficit reduction, which implies additional spending reductions of about a further £8bn; a jobs package at £600m; more funding for poor school pupils at £2.5bn; and higher old-age pensions costing about £2bn.
Set against this are near-term plans to raise taxes on aviation of £3bn and capital gains tax of about £2bn. Put this together and Mr Osborne will have to announce public spending cuts of £57bn a year by 2013-14 from a non-protected budget of about £260bn – cuts of about 22 per cent. The next few months will see the government progressively coming clean about these figures, blaming its predecessor for the mess it has inherited, and softening the public up for the brutal cuts to come.
First, a newly created Office for Budget Responsibility will present fresh forecasts for growth and borrowing, which are likely to show that the underlying problem is worse than thought. Then an emergency Budget by the end of June will set out the government’s ambitions for faster deficit reduction. And in the autumn, detailed spending cuts will be outlined in a spending review covering the next three years. This will be the defining moment of the new parliament. Britain’s public sector will face similar austerity measures to those seen in Ireland, Greece, Portugal and Spain (http://www.ft.com/indepth/eurozone-bail-out).
It is only when the chancellor announces the pain, rather than the gain, from the new government, that we will know whether this coalition will stick.
...
Thoughts?
By Chris Giles, Economics Editor
Published: May 12 2010 21:06 | Last updated: May 12 2010 21:06
“Deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain,” states the coalition agreement (http://media.ft.com/cms/eb8fec98-5dca-11df-b4fc-00144feab49a.pdf)between the Conservative party and the Liberal Democrats. If so, the rest of the document does not live up to the billing. Compared with budget plans the government has inherited from its Labour predecessor, the agreement included no specific new spending cuts, lots of public spending pledges, copious tax cuts and a commitment to faster deficit reduction. Unless there are huge spending cuts or tax increases planned but not yet announced, far from contracting, the deficit is about to deepen. It is not that the Conservatives and Liberal Democrats are deliberately misleading the public by saying they want “a significantly accelerated reduction in the structural deficit”. Rather, their plans for specific – and uncontentious – spending increases and tax cuts are well defined, while the broader objective of large net spending cuts and tax increases remains cloaked in secrecy
Day one for George Osborne consisted of phone calls to foreign finance ministers and British business groups. The chancellor also rammed home to officials, who clapped him into the building, the importance of David Laws, a Liberal Democrat and chief secretary to the Treasury. This was intended to send a message: that the coalition is real and Mr Laws is locked into the deficit reduction plan, Treasury insiders said. But Treasury officials, whose job it is “to speak truth to power”, did not say whether the induction of Mr Osborne and Mr Laws had included an outline of the full implications of the government’s aim to reduce the budget deficit faster – at the same time as offering new spending pledges and tax cuts.
First, the Treasury’s existing plans for public spending already imply cuts to government departments of £37bn (2.5 per cent of national income) a year by 2013-14. Added to this, the coalition agreement has committed the parties to increases in spending on overseas aid with an annual cost of £4bn; fresh income tax cuts with a price tag of about £5bn, as a downpayment on the Lib Dem plan to raise income tax thresholds; £3bn a year for avoiding some Labour tax increases; faster deficit reduction, which implies additional spending reductions of about a further £8bn; a jobs package at £600m; more funding for poor school pupils at £2.5bn; and higher old-age pensions costing about £2bn.
Set against this are near-term plans to raise taxes on aviation of £3bn and capital gains tax of about £2bn. Put this together and Mr Osborne will have to announce public spending cuts of £57bn a year by 2013-14 from a non-protected budget of about £260bn – cuts of about 22 per cent. The next few months will see the government progressively coming clean about these figures, blaming its predecessor for the mess it has inherited, and softening the public up for the brutal cuts to come.
First, a newly created Office for Budget Responsibility will present fresh forecasts for growth and borrowing, which are likely to show that the underlying problem is worse than thought. Then an emergency Budget by the end of June will set out the government’s ambitions for faster deficit reduction. And in the autumn, detailed spending cuts will be outlined in a spending review covering the next three years. This will be the defining moment of the new parliament. Britain’s public sector will face similar austerity measures to those seen in Ireland, Greece, Portugal and Spain (http://www.ft.com/indepth/eurozone-bail-out).
It is only when the chancellor announces the pain, rather than the gain, from the new government, that we will know whether this coalition will stick.
...
Thoughts?