I think it is a pity public spending rose by 5.3% last year. I favoured starting the five year deficit reduction plan with a year of smaller increases in spending in cash terms and set out suitable ways of achieving this . I tried to persuade the government to do this. The government could have explained it needed to make more of the adjustment at the beginning. I also thought more could be done in year one to use natural wastage and actions on costs.
If the government had started like that, the whole strategy would have entailed spending less over the 5 years , and borrowing less as well. That in turn would have saved more in interest charges by Year 5, leaving more for services. I might have put an extra 1% increase in Year 4 and an extra 2% in Year 5, whilst taking out 1% from Year 2 cash spending growth growth, as well as lower increases in 2010-11. That would have meant a further saving. It would also have given a bit more flexibility on spending nearer the election.
I would also have set more competitive tax rates on income, capital gains and profits, from the first year. This would enable the government to collect more revenue, perhaps around £20 billion extra over the plan period.
Instead I think we have to assume there could be adverse slippage from the government’s Plan A. There could be less revenue, if growth does not reach and maintain the faster rates forecasts. There could be more spending, both as a result of slower growth and therefore more welfare cost, and as a result of the need to be flexible over some of the spending decisions nearer the election. We may well see more of the forecasters start to pencil in slippage to their estimates, if the world economy remains troubled and UK growth subdued.
To ensure the borrowing total remains achievable, without alarming markets, the government would be well advised to do more to cut costs and control spending this year, when the overall budgets remain fairly accommodating. £485 billion of extra borrowing for the five years has not alarmed markets, but too much slippage from this large number might. If this year current public spending rose 2% instead of 3.8% that would give the whole strategy a boost, and assist in getting borrowing under some control.
Today ITEM announce a lower f0recast for growth. Lower growth means less revenue and more public spending. The media keep talking about the cuts. The risk of this strategy is that the government is hoping to spend and borrow too much over the whole five years, if growth disappoints. No-one seems to talk about this. The UK does not lack total public spending, but it does need more private sector led growth. We can argue about the value you get from the spending and the priorities for it, but this strategy was always going to run risks with how much the state can borrow. A plan based on large tax revenue rises from growth is very sensitive to achieving the growth rate. ITEM are querying that today.