A little while ago I argued on this site that the squeeze is and will be tougher on the private sector this winter and well into 2011 than the squeeze on the public sector. Indeed, overall the 7% increase in public spending under this government so far compared to a year earlier shows there has not yet been any squeeze on the public sector. This does not of course prevent individual cuts and hard done by areas, resulting from poor management or from the allocation of the extra cash. Nor does it prevent much talk about future cuts, as public sector managers try to find ways to get more money out of government or Councils.
The Governor of the Bank of England has now highlighted the other side of the case I was making – the intensity and duration of the squeeze on private sector incomes. The increases in Income Tax, CGT, National Insurance, VAT, and fuel duty always meant the private sector was going to take a big cut in spending power as its share of the deficit reduction. This has been made worse by the rapid rise in inflation, with big increases in fuel prices which in turn extracts more tax revenue and by the large increases in various pullic sector fees and charges like rail fares.
The public debate has spent too much time talking about the spending reductions, implying they hit the economy at the end of last year and caused the poor GDP figures, when they haven’t begun, and ignored the squeeze on family incomes. The government needs to take action to cut the public sector’s contribution to the squeeze. It could begin by introducing the fuel price stabiliser, much in need at a time of instability in the Middle East again. It needs to bring inflation back under control by following a more successful money and banking policy.
To get enterprise growing, creating the many new jobs we need and welfare reform requires, we need tax cuts. The Chancellor should be dusting down plans to get the UK back into shape as a competitive place for business and investment. Recent years of tax increases has left us struggling, losing capital, talent and companies that could make a difference.