The Government plans to "tackle Labour's legacy of debt" yet they are also proposing a number of tax cuts. But there is an alternative way to reducing the deficit.
An email from David Cameron to Conservative supporters on Monday evening promised that the new Government would “tackle Labour’s legacy of debt”. No mention, of course, that the Conservative party were complicit in calls for light touch regulation and had been calling for years for an end to “burdensome” and “unnecessary” regulation. They will do this by focusing on “benefits, tax credits, and public sector pensions“. But there is an alternative to “Osborne’s bombshell“.
The graph below from the Institute for Fiscal Studies shows how Government revenue and spending has widened since the recession started. It shows clearly that before the crash, current spending excluding capital projects and revenues were virtually in balance. The deficit has been caused by increased spending – primarily due to automatic stabilisers such as unemployment benefits and the financial sector bail outs – but also by falling tax receipts.
In this public finance environment, it is extraordinary that the Coalition Agreement argues for several tax cuts including:
• an increase in the personal allowance for income tax – a Lib Dem priority which does nothing for the poorest families;
• a regressive move to cut to the planned increase in employer National Insurance – dubbed Labour’s “jobs tax“, ironic given the Government’s focus on cutting public sector jobs;
• reductions to the corporation tax rate which will do little to boost private sector output;
• a freeze to Council Tax in England for at least a year; and
• the introduction of a transferable tax allowances for married couples to “recognise marriage in the tax system” – a policy which will discriminates against single parents, widows, and married couples where both couples are in full-time work.
Recent research by Stan Greenberg shows that tw0-thirds of voters believe that “it is not the time to cut taxes” (p.44). Some spending cuts will, of course, be necessary (who really mourns the loss of ID cards?) while the overall level of spending will fall if the recovery is secured. But the Government’s planned attacks on the solidarity and redistributive impact of the welfare state is only one approach to deficit reduction. The alternative is to abandon these tax cuts and push ahead with many of the progressive tax raising proposals in the Compass report, ‘In place of cuts‘.
UPDATE 13.10:
Paul Krugman has an excellent blog outlining why the “fiscal austerity” of Cameron, Merkel and others is affecting the rest of the world:
We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a hole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)
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23 Responses to “The alternative to “Osborne’s bombshell””
Billy Blofeld
Former Labour Treasury Minister Lord Myners says…
“There is nothing progressive about a government that consistently spends more than it can raise in taxation and certainly nothing progressive that endows generations to come with the liabilities incurred with respect to the current generation”
It is time to interact with the real world again Will.
Does Gordon win the next regressive of the week accolade?
Andy Sutherland
RT @leftfootfwd: The alternative to "Osborne's bombshell" – stop the Lib-Con's tax cuts http://bit.ly/aiRESu
Will Straw
Billy – I agree with Lord Myners statement, I just don’t agree with his solution. It was irresponsible of Gordon Brown to run a current spending deficit during the mid-2000s boom but this had closed by the time of the crash. The question is all about how we close the deficit. Some spending cuts will be necessary, as I concede. The question is where the green and black lines should once again come together. You want it to come in below 36%, that’s a perfectly legitimate position but means a serious attack on both public services and the welfare state. I am arguing for something different, which is fiscal balance at 40-42% of GDP. This means no Lib-Con tax cuts, and a few more tax rises but also requires spending to come down by 6 to 8 percentage points.
DevonChap – all the more reason to use policy to expand rather than contract the tax base. Fair point on the interest payments although the differential is small compared to the proposed cuts.
Will
The alternative to “Osborne’s bombshell” « Dnmufc's Blog
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John Lees
From the IFS report you quote:
“By the eve of the financial crisis, this had left the UK with one of the largest structural budget deficits in the developed world.”
I take it the alternative is to do notheing and borrow more and more in teh hopes that our lucky grandchildren can pay it off???