The government’s whole financial strategy rests on growth. Deficit reduction is planned primarily through a surge in extra tax revenues, which grow as the economy grows. By 2014-15 the government forecasts £172 billion a year more from taxation than in the last Labour year.
This big increase in taxation is needed to pay for the increased total public spending, up by £73 billion a year over the same time period, and to cut the deficit substantially. Public spending cuts have been cuts in Labour’s planned increases, or cuts in certain programmes in order to fund larger increases in the government’s priorities that include overseas aid, the EU budget and assistance to Euroland.
Most commentators and politicians agree that growth is needed to help the UK out of the financial hole it is in. Growth reduces the need for spending cuts and tax rises. If growth does not move to above trend from next year and stays there for the following three years, there will be a shortfall in revenue and extra public spending.
Critics of the government say it has cut too far and too fast and jeopardises growth as a result. As the government plans to borrow an additional £485 billion over its planned five years, more than the total state debt just ten years ago, it is difficult to sustain the argument that it has been too tough. Given that public spending rises by a substantial cash amount, the argument is more one over what that money can buy. If the government enforces a fairly successful public sector pay freeze for a couple of years, and manages to buy things more cheaply as it has promised, the cash increase could even translate into a real increase in spending.
Promoting faster growth requires changes to banking, regulation and taxation. We will look at each of these in turn this week.