The new government has lined up behind the Conservative proposal in the General Election. They say they will cut earlier and faster than Mr Brown was planning in his deficit reduction bill. I agree they need to do just that.
In their Coalition Agreement they say:
” The parties agree that modest cuts of £6 billion to non front line services can be made within the financial year 2010-11….Some proportion of these savings can be used to support jobs”
They need to go further than that. I hope they will put in place policies on recruitment and replacement that will start to yield more substantial savings and productivity gains outside the protected areas of teachers, nurses, doctors and other front line personnel. I hope they will press rapidly on with welfare and other economic reforms to get more people back to work to cut the benefits bill.
The BBC and others are trying to re-open the debate about the balance between tax rises and spending cuts. The Coalition has so far been clear that the bulk of the deficit reduction has to come from spending cuts. They should not waver on this fundamental point.
The only way out of this crisis is to get faster growth in the private sector, creating more jobs to boost living standards and take some of the burden off the publlic sector payroll. Trying to protect existing levels of public sector employment and public sector unemployment support by taxing more could have the opposite effect, making it more difficult to maintain private sector employment levels, forcing more people onto benefit and making the deficit worse.
The government needs an enterprise package to boost employment as well as cost reductions in the overborrowed public sector. Higher tax rates on business, earnings and savings would drive things in the wrong direction. Lower tax rates often yield more revenue because they boost earnings and investments. We also need banking reform, so that the banking regulations are no longer forcing the banks to lend just to the government and not to the productive private sector. Bank regulation is still hopelessly pro cyclical, reinforcing the downturn somewhere near the bottom of the cycle.