Leading think tanks go on the offensive – no party is spared

With polling day just four days away a refreshing sense of honesty, albeit of a brutal nature, was delivered this week by two leading economic think tanks.

With polling day just four days away and all parties holding back from laying their true fiscal deficit reduction cards on the table, a refreshing sense of honesty, albeit of a brutal nature, was delivered this week by two leading economic think tanks. Both categorically sought to deliver an honest and blunt assessment of Britain’s fiscal state, and the painful medicine the nation will sadly have to bear in the years ahead.

On Friday, the National Institute of Economic and Social Research (NIESR) released a report arguing that major tax rises will be necessary in order to curb the fiscal deficit and prepare for any future economic difficulties that would require fiscal action. There needs to be sufficient economic leverage in place for emergencies, hence their most controversial proposal is to increase the basic rate of income tax by 6 pence in the pound.

This they argue would help to reduce the deficit by an ‘additional’ 2%. Electorally, this would be impossible for any one single party to do, particularly after the stark message delivered by the Governor of the Bank of England on Thursday. Mervyn King was reported to have warned that the next government would have to make cuts of such severity they would be “out of power for a generation”.

NIESR’s analysis concludes that tax rises are not only necessary, but may even be economically desirable as their effect on job creation and GDP growth in the short term is almost 50% lower than a related reduction in public spending. This puts pressure on all the parties to announce bolder tax rises.

The institute also criticises the Conservative Party’s opposition to next year’s national insurance rise and plans to start cutting the deficit this year. They conclude that the £6bn necessary to stop most of the NI increase (funded by additional public spending cuts) will lead to job losses between 30,000 and 60,000 and stymie growth by 0.1 to 0.2%. Serious questions still remain around Conservative plans for the economy.

Earlier, the Institute for Fiscal Studies (IFS) kicked off the week by making clear that whoever wins the election will have to embark on the most dramatic public spending cuts in a generation. It highlighted the fact that all parties were committed to a minimum fiscal deficit reduction of £71bn in real terms, or 4.8% of fiscal output.

Labour is aiming for a 2:1 ratio (spending cuts: tax rises), Lib Dems 2.5:1, and the Conservatives 4:1. This is in comparison to the last major fiscal consolidation in Britain that took place in the early 1990s. The ratio during this squeeze was 1:1.

The IFS feels all parties are being overambitious in their plans to cut public spending, in particular the Conservatives who they say in order to achieve their target will have to embark on the sharpest spending cuts since the Second World War. A favorite trick of previous Tory governments was not to index link rises in personal allowances to inflation, thereby ‘dragging’ lower earners into higher rates of taxation.

Such political trickery cannot happen again. The British people are smart enough to be aware that severely constrained times lay ahead, perhaps for years to come. Without honesty, a severe public backlash may be in the offing.

The only question now is what verdict will the British public deliver on May 6th?

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