The Coalition government came together to sort out the poor state of the nation’s finances. On leaving office Labour legislated to halve the extra borrowings in the years ahead, without making clear how they would do this and without saying which budgets would be cut. The incoming government said they would get rid of the structural deficit, the main bulk of the extra borrowing each year, over the lifetime of this Parliament. They intended to do it mainly by curbing public spending.
So how are they doing? The government tells us it has got the deficit down by a quarter so far. That means that instead of borrowing £155 billion more, as Labour did in their last year, this government got that down to borrowing an extra £120 billion last year. This year the government has found it harder to keep the pressure on. The latest figures show the government borrowing more this year than last. In the first nine months the government borrowed £106 billion, £7 billion more than the same period last year.
The government has had to abandon its plans to get rid of the deficit this Parliament. Why has this happened?
There are two main reasons. The first is spending. The Coalition, far from cutting current public spending, decided to put it up. They have delivered this promise. We have seen bigger rises in pensions and benefits, more generous payments to developing countries, a large rise in our EU contributions, further rises in money spent on schools and hospitals. Spending went up by £29 billion in the first year, £18 billion the second year, and a planned £17 billion this year.
The second is tax revenue. The Coalition inherited the planned rise in top rate income tax to 50% from the 40% Labour always thought appropriate when in office. This led to a sharp fall in receipts from rich people, as they left the country or rearranged their tax affairs, or simply earned less. The rise in Capital Gains Tax rates did not help, and company profits tax has also been weak. Only the increase in VAT worked and brought in more money to help pay for the public services.
So what should they do next? We need above all a stronger recovery in our economy. That takes more action to mend banks and to make it more worthwhile working.