David Cowan 6.00am
George Osborne has stuck to his original spending plans but abandoned his 2014-15 target for eliminating the structural budget deficit.
Instead there will be further 0.9 per cent cuts in real terms to current expenditure during 2015-16 and 2016-17. Over the seven year period public expenditure will fall by 16.2 per cent in real terms.
This means that during the Conservatives will be going to the country in 2015 with the pledge to cut an extra £116 billion over two years.These are dangerous and unpredictable times. It is especially worrying when the OBR’s gloomy forecasts are based on the optimistic assumption that the Eurozone will survive its sovereign debt crisis.
The two year extension of the deficit reduction plan is also based on the complacent assumption that the Conservatives will still be in power in 2015. George Osborne should have refuted this complacent attitude and repositioned his fiscal policy in a credible manner, as by the 2012 Budget we could be living in a very different world without the Euro and the onset of another global recession, if not a depression. A more credible fiscal policy would have been a reaffirmation of the commitment to eliminate structural budget deficit by 2014-15 by announcing some preliminary spending reductions which would go towards paying back the debt, such as scrapping the £34 billion ‘white elephant’ High Speed Rail 2 project (something Nik has blogged repeatedly about on these pages) and stop the £113 million going to trade unions every year (see Craig here), but then also say that further detailed spending reductions would be announced in the 2012 Budget with explicit aim of implementing the £216 billion cuts before 2015-16.
This course of action would allow new spending plans to be formulated in response to developments in the Eurozone. There is a need for further spending reductions if the coalition is going to put Britain back on track, keep borrowing costs and long term interest rates low, and maintain our perceived safe haven status. However, George Osborne’s plan can only work if the economy starts growing again. The Autumn Statement was an opportunity for radical action but instead we got a ‘Brownite’ flurry of statistics and a plethora of small initiatives for ‘credit easing’, the Regional Growth Fund, and a ‘youth contract’. All of which amounts to well over £10 billion at a time when we are adding another £145 billion to the national debt.
These schemes will waste taxpayers’ money on new bureaucracies and inefficiently re-allocate resources towards unproductive sectors of the economy. George Osborne has weighted his growth strategy too heavily towards a Keynesian style stimulus based on state intervention and cheap credit. He needs to bring the focus back towards supply side reform. There are seeds of hope with the delay of the 3p increase in fuel duty, the aim to integrate the operation of income tax and national insurance contributions, the consultation on abolishing national pay bargaining, public sector pension reform, the liberalisation of employment legislation, and a more flexible planning system.
However, George Osborne could have been more radical. Indeed it would not be going so far as to say that it is essential for the future of the British economy that the Chancellor pursues this route instead of issuing headline grabbing micro-initiatives.
The ghosts of Keynes and Brown are well and truly alive in Her Majesty’s Treasury.