The Coalition has attacked Alan Johnson's deficit reduction plan. The truth is that it is costed and will result in a much lower impact on growth.
The usual suspects have their knives sharpened for Alan Johnson this morning. The Tories have accused Labour of a “black hole” over their revised deficit reduction plans while the Lib Dems claim that Johnson’s plan will result in “crippling interest payments“. Meanwhile, the Mail accuse Johnson of wanting to “tax and spend Britain out of economic mire” while the Telegraph takes a similar line and says “Labour would tackle the current economic malaise by raising taxes and continuing to spend“. The truth is that the shadow Chancellor’s plan will still mean billions of cuts, but it will result in a much lower impact on growth than George Osborne’s approach – a £34 billion cut to growth compared to £59bn.
The June Budget outlined that Alistair Darling’s was committed to deficit reduction of £73 billion by 2014-15 compared to £113 billion for the Tories. Labour stuck to this yesterday but changed the ratio of spending cuts to tax rises from 71:29 to 56:44. Labour’s planned tax increases included the 50p tax rate and rise in NICs that was due to deliver £21 billion. The proposed tripling of the bank levy, extension of the bankers’ bonus tax, and adoption of the Coalition’s capital gains tax increase adds a further £7.6bn to the total so that it now equals £28.6bn.
On the spending side, Paul Waugh expertly explains how the £52 billion of spending cuts needed by Labour comes down to £34 billion in contrast to the Conservative’s £61 billion. Both sides will need to set out how they will achieve the bulk of this. Left Foot Forward has broken down the figures even further and plugged in the OBR multipliers that Johnson alluded to in his speech. Mr Johnson said:
“And we know from the Office for Budget Responsibility’s own figures that a spending cut hits growth twice as hard as a tax change – three times as hard when it’s capital spending.”
The multipliers – which have been criticised as “a little on the low side” – are contained in Table C8 of the June Budget. Our analysis shows that, using the OBR’s own figures, George Osborne’s plan will reduce GDP by £59 billion while Johnson’s plan reduces GDP by the far lower figure of £34 billion.
And far from causing “crippling interest payments,” Labour’s slower plans will only increase debt interest payments by £4 billion (see Table C13) – a figure dwarfed by the additional hit on GDP of the Coalition plans.
28 Responses to “Osborne’s deficit plan hits growth twice as hard as Johnson’s”
Ash
Mr Jabberwock – I think what you’ve missed is the *structural* part of the deficit; the part that growth won’t get rid of automatically as the economy comes out of recession. The other part – the cyclical part – will indeed come down faster the less we cut, because Government spending (like spending by businesses and consumers) encourages growth.
harry potter
government spending discourages growth. it increases interest rates and makes consumers and businesses wary about spending because they know taxes are going up.
Ash
“government spending discourages growth. it increases interest rates and makes consumers and businesses wary about spending because they know taxes are going up.”
Ah yes – that must be why interest rates soared to 0.5% at the peak of Labour’s spending, and why we now see a renewed surge in consumer and business confidence every time a fresh spending cut is mentioned.
Silly me – fancy thinking that sacking people, cutting benefits, freezing wages, and scaling back capital investment could damage growth!
On the bright side, if cutting spending actually *increases* growth, this deficit will be gone in no time. Those silly old OBR and Treasury people have based their forecasts on the preposterous idea that growth will be somewhat lower as a result of £83 billion in spending cuts.
Who’d have thought that Harry Potter would be the man to finally bury Keynes? All these decades so-called ‘economists’ have been advising governments that cutting spending during recessions would make matters worse – if they’d only listened to this heroic young wizard instead, we’d have rocketed out of every recession in half the time and with a lower debt to boot!
Today the Triwizard Cup – tomorrow the Nobel Prize for economics!
Mr. Sensible
Will these figures show us how much of a risk this government is taking with the economy.
If growth slows, tax receipts are less, welfair payments go up and so you stand less chance of cutting the deficit.
There is an alternative | Left Foot Forward
[…] Osborne are twofold: (i) go slower, and/or (ii) put more emphasis on taxation. Both approaches reduce the impact of the fiscal consolidation on growth in a manner which more than offsets the additional debt interest payments. The OBR (Table C13) is […]