The Chancellor, George Osborne, had a lot of good news to announce in his Autumn Statement on Wednesday. Well, he would, wouldn’t he – there’s an election coming up. But on the one issue that has perhaps most defined his term in office he rather rushed through the new information he had to impart. His plan to get rid of the huge deficit in government finances is falling far behind schedule. Nonetheless, he says he’s determined to restore the government’s books to the black in the next parliament. So is his Labour shadow, Ed Balls. But neither is really telling us how. Can we believe either?
After all the travails of the last few years and the confident predictions of many that his economic policies could not possibly work, Mr Osborne must have taken great pleasure in laying out all that is going well with the British economy. Economic growth, at 3% this year, is the strongest among the big advanced economies. Unemployment has been dropping like a stone and Britain is generating more new jobs than the whole of the rest of the European Union put together. Inflation is well and truly under control.
Of course it is not all roses, and certainly not for everyone. Many of the new jobs are on low pay and part-time. Wages in general have only very recently started to keep up with the rise in the cost of living, meaning that most people still remain worse off than they were before the financial crisis of 2007/8 plunged the world economy into recession. It’s expected that real wages will still be lower in 2019 than they were then. British productivity, on which future prosperity relies, is execrable. Nonetheless, progress was sufficiently good for the Chancellor, on the back of independent forecasts from the Office for Budget Responsibility (OBR), to say that Britain was ‘on course’ for growing, sustainable prosperity.
But the bad news on the government’s own finances, its fiscal deficit, could not be brushed under the carpet. When he came into office back in 2010, Mr Osborne made tackling the deficit his chief goal. Labour’s profligacy with the public finances, he claimed, had helped get us in the mess we were in and it would take a Conservative chancellor, following policies of hair-shirt austerity towards government spending, to get on top of the problem. His goal was to eliminate the ‘structural’ deficit (the part of what it borrows unaffected by the swings and roundabouts of the economic cycle) by the end of this parliament.
His critics said such a tough approach would simply plunge the economy into an even deeper recession and make the deficit worse, not better. When it looked as though this would happen he took the pragmatic option (while the rhetoric remained one of ‘sticking to the course’) and eased things up a bit. The result has been the boost to economic growth and the fall in unemployment we have seen. But it hasn’t led to the shrinking of the deficit that might have been expected.
That’s because the growing economy hasn’t led to the usual growing tax receipts that would have eased the deficit. Income tax receipts, in particular, have fallen short of expectations, largely because so much of the new employment has been among those who pay little or no income tax. It is now forecast that in 2017/18 overall tax receipts will be a colossal £20bn less than was predicted as recently as last March.
As a result of all this, Mr Osborne had to announce that far from having got rid of the deficit, he was going to have to borrow £91.3bn this year, nearly £5bn more than had been expected back in the spring, and that next year he will have to borrow £7.6bn more than planned. Now we are told that it won’t be till 2019/20 that the government will be out of the red, and no one puts much faith in economic forecasts that far ahead. Ed Balls said the Chancellor had already borrowed £219bn more than he said he would back in 2010.
In effect, Mr Osborne has got rid of only half the deficit, which currently amounts to 5% of our national income, a far higher figure than that tolerated in most other advanced economies. And as the annual deficit persists, Britain’s overall government debt burden increases. It is now heading to over 80% of GDP.
Mr Osborne says he is ‘the first to admit’ that the deficit is still too high and needs to be eliminated and this he has pledged to do if re-elected next May. But how? The Tories have said they intend to do it solely by bearing down on government spending rather than by increasing taxes. Indeed the Prime Minister told his party conference he wanted to cut taxes by £7bn a year in the next parliament, adding further to the pressures on spending.
But to tackle the remaining deficit exclusively through public spending cuts would, in the words of Robert Chote, the OBR chairman, ‘imply a very tight further squeeze on public services spending’. He estimates that only 40% of the cuts have so far happened, leaving 60% for the next parliament. Assuming that health, schools and overseas aid remain immune to cuts, the axe will have to fall on other services, such as police, transport and the environment. The OBR reckons that central government spending on day-to-day services would have to fall from 21.2% of GDP in 2009/10 to 12.6%, ten years later, the lowest such proportion since 1938. Government spending as a whole would fall to 35.2% of GDP, the lowest since 1948. It has been estimated that a further million public sector jobs could go.
Paul Johnson of the independent Institute for Fiscal Studies said: ‘That is huge by any standards and bigger than the cuts delivered so far’. Mr Osborne’s cabinet colleague, the Liberal Democrat business secretary, Vince Cable, was more blunt, saying it was ‘wholly unrealistic’.
The Chancellor dismisses these criticisms saying they come from exactly the same people who said exactly the same thing back in 2010, yet the world has not collapsed despite the cuts imposed in the interim. But pressed (by me among others) to say where exactly the axe will fall, he remains coy, though he does point to the welfare budget, suggesting that working-age benefits will continue to be frozen and other entitlements restricted, such as lowering the cap on what any family can receive in total benefits. In short, he does not want to frighten the horses before the election.
And what about Labour? Mr Balls says he too wants to get rid of the deficit ‘as soon as possible’ and certainly by the end of the next parliament. He too says there will be a need for spending cuts (though he too declines to tell us what, beyond a few small savings). Unlike the Tories, Labour says it is prepared to increase taxes (as are the LibDems) though, again, so far only fairly modest revenue-raising taxes on the rich have been specified. Mr Balls wants to rely on ‘finding a way’ to develop the economy so that it generates more tax income and talks of raising the minimum wage as a means of doing this. His opponents say such a policy has far more to do with shoring up the Labour vote than with any strategy for creating a high-income economy.
In short, none of the parties is prepared to go into detail about how they would tackle what they all insist remains a major problem, reducing the deficit. This has led some wags to claim British politicians are presiding over a candour deficit as big as the fiscal one.
The more cynical would say that voters shouldn’t even believe politicians when they say they want to get rid of the deficit. Of course they’d prefer not to have to borrow so much money, but if not doing so gets in the way of their ability to bribe the voters to vote for them, then ‘first things first’, the argument goes.
Is that too cynical? What’s your view? Do you think the main parties are serious about trying to reduce the deficit? Do you think they should be or do you think we can live with these levels of borrowing? If you do think we need to reduce the levels of government borrowing, do you think it should be done solely through cutting public spending or also by raising taxation? And which party do you think has the best policies on the issue?
