With the Spending Review just four weeks away, pressure is beginning to ramp up on George Osborne with widespread public dissatisfaction over his cuts and a challenge from his colleague, Boris Johnson, over the strategy. Pre-empting the Labour leadership candidates’ debate on deficit reduction, I gave a presentation to the Reform think tank earlier this week setting out my own deficit reduction plan which avoids the masochistic excesses of the chopper Chancellor.
My slides started with four graphs setting out the true story about the deficit, public debt, and the bond market using figures from HM Treasury, the OECD, and Bank of England. Regular readers of Left Foot Forward will be familiar with the argument on which I elaborate below(*) but the essential point is that while the deficit has to come down, there is no compelling economic case for the pace of retrenchment that George Osborne proposes.
But since the deficit has to come down, how can we do so responsibly? My proposal is to stick to Alistair Darling’s plan to cut the deficit in half over four years but split the impact 50:50 between tax and spending cuts – precisely what Norman Lamont and Ken Clarke did in the 1990s.
This would mean £28.5 billion in tax rises by 2013-14 delivered through the 50p tax rate and fulfillment of Labour’s proposed increases to NICs. I would add to that a mansion tax, the full Capital Gains Tax rise proposed in the Lib Dem manifesto, and a doubling of the banking levy.
On the spending side, there is no need for any of the deeply regressive welfare cuts including to housing benefit, the freeze on child benefit, or tax credit reforms (though I do have some sympathy with making 16 the cut off for child benefit). Instead, I would look for an average efficiency of 8.1 per cent across all Government departments aside from DfID. This would, of course, include the Health department which makes up close to one-third of all departmental spending. A significant chunk of this could come from a 3-year public sector pay freeze (around £8 billion according to the SMF).
Before getting into the broad macroeconomic and specific microeconomic policies that are needed to deliver economic growth, this responsible deficit reduction would reduce growth by virtually half as much as the Tory programme. Using the cautious multipliers estimated by the Office of Budget Responsibility (Table C8 of the Budget), I have calculated that my deficit reduction plan would take just 1.5 per cent out of the economy compared to 2.7 per cent by the Conservatives.
The responsible deficit reduction plan also avoids the ideological and masochistic approach taken by the Tories. There is no need for a regressive VAT rise, no need for huge welfare cuts that will disadvantage the most vulnerable, and no need for 25 per cent cuts from unprotected departments.
Given the proximity of the Spending Review, I’d be very interested to hear your thoughts on this approach.
* Labour should take responsibility for running a slight cyclically-adjusted structural deficit from 2005-07. During this period it was irresponsible to allow spending to continue to rise without a commensurate increase in tax revenues. But most of that small deficit was due to capital spending and, crucially, the Tories backed Labour’s spending plans until November 2008.
The record post-war deficit seen since the recession has been due to the financial crash including bailouts for the banks, increases in spending on unemployment and other benefits, and a falloff in tax receipts. Public spending also appears to have shot up on a percentage scale since GDP has fallen by around 6 per cent.
But Britain is in a good position to absorb this increase so long as the deficit is reduced over the medium term. Labour had brought down public debt after it rose in the mid-1990s. We are well placed internationally to absorb the rise and the bond market shows no signs of raising long-term interest rates. (And, no, this is not due to George Osborne’s policies as our own Duncan Weldon and the Independent’s Ben Chu showed yesterday).
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42 Responses to “A responsible deficit reduction plan”
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Mr. Sensible
Will, there are a lot of interesting things in here.
I think I agree with a reasonable amount of it.
I believe that, not only should the top rate of tax stay, I think it should be set at £100000, rather than £150000.
Just 1 question, Will. You talk about maintaining Osborne’s plan to freeze pay in the public sector for people earning above £22000. In the Guardian in July, there was outrage expressed that this was going to apply to our armed forces, too. Do you have any thoughts on this?
Supporters of the cuts ask us ‘so what would you cut?’ Well there are 2 things to bear in mind.
1. At the same time as cutting spending saying we need to save money, the coalition is embarking on its own spending and tax cuts. For example, the Lib Dems talk constantly about how they’ve taken so many people out of income tax, but how is it being paid for? It, like the freeze in Council Tax, like the cut in Corporation Tax, is being paid for by the increase in VAT.
2. Cutting things like Building Schools for the future, increasing VAT, cutting capital allowances for manufacturing will not help the economy either. These cuts won’t just effect frontline services; they could hamper our prospects for growth, jobs, and thus actually cutting the deficit.
Ash
OK – here’s my latest patented ‘we’re sticking to Darling’s target but with minimum cuts, to maximise growth and protect public services’ deficit reduction plan. This is following the Lib Dems’ announcement that they aim to raise £7bn by tackling tax avoidance & evasion. I’m supposing here that revenue gained by enforcing *existing* taxes shouldn’t be regarded as coming from ‘tax rises’ for the purposes of setting out one’s favoured tax rises/spending cuts split.
Darling’s target: half of £167bn (projected in March Budget) = £83.5bn.
Total deficit reduction package required to hit that target: believed by Darling to be £57bn. Now known to be £45bn (because the 2009/2010 deficit is now known to have been £155bn, not £167bn).
Expected contribution to closing deficit of action on tax avoidance and evasion: £7bn.
Expected contribution to closing the deficit of additional growth resulting from lower-than-planned spending cuts: £2bn. (This is pure guesswork! Needs crunching with OBR multipliers.)
Tax rises: £18bn.
Spending cuts: £18bn.
That’s one third less in tax rises than the Coalition, more than two thirds less in spending cuts, and only their own assumptions on avoidance & evasion – plus a clear message that cutting less means growing more means closing the deficit further. And £18bn is an amount of spending cuts I can actually start to believe could be achieved without doing real damage to public services and the economy.
Right, that was easy. I’ve saved the country from disaster, now for a cup of tea.
Mr. Sensible
Ash, read the comments today on that plan by Hélène Mulholland in the Guardian today:
http://www.guardian.co.uk/politics/blog/2010/sep/20/tax-avoidance-christensen
The tax that’s avoided in this country could probably come close to, if not fully eliminate the structural deficit.