We need to start from the current reality. Spending soared in the August figures, up more than 10% on the same month last year. In September there was a record deficit, thanks in part to the very small increase in Income Tax revenue. Slow or no wage growth and the impact of 50% tax rates on the the numbers of high income people here to be taxed and on the timing of their bonuses dampened receipts.
The government was right to make curbing the deficit its first priority. Its clear wish to do so has stablised the market in government debt, driving down the cost of government borrowing further. To sustain this gain it needs now to show that the deficit is coming under control. The government is right to think there is no choice between curbing the deficit early and leaving it to later. The latter course could bring us quickly into Greek and Irish crisis territory.
The risks of the strategy are twofold. The first risk is Can the government deliever sufficiently constrained public spending, given the difficult politics of public sector management in the UK? The second is, can the “Growth Strategy” succeed in so stimualting the private sector recovery that enough tax revenue and additional jobs are generated?
I discussed the politics of the public spending yesterday, and made some suggestions of other ways to achieve the savings needed that might be better politically. The government’s chosen route depends substantially on welfare and benefits reform which will prove difficult, but could be done, as President Clinton showed in the USA. It also depends on holding the line with local governemnt, who will not be too happy about their settlement. The government needs to be tough from today on extra spending in all areas. This is not time to be buying new cars, new computers, or even adding to the stocks of cartridges for printers.
Generating the revenue according to Treasury plans requires above trend growth in each of the years from 2012 to 2015. The revenue forecasts also assume that higher rates of Income Tax and CGT raise more revenue, whereas past experience shows that above a certain rate taxpayers leave, work less hard or find ways round the tax.
The curbs on public spending announced are not large enough overall to cause a second dip or recession. The end of increases in the public sector payroll will free some good people to work for an expanding private sector. This year there has been good job growth so far.
The government will be well advised to reduce the risks of the economic strategy by coming up with an ambitious growth package with measures that set a tax and regulatory framework which is compellingly attractive for enterprise.