Could there be a Plan B for the economic strategy?


          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.

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  1. lifelogic
    Posted July 18, 2011 at 6:52 am | Permalink

    Indeed but you put it rather too gently.

    The current high tax strategy is totally counter productive. One should not underestimate the value, in a country like the UK, of setting a vision of a low tax, business friendly environment – to encourage inward investment and discourage it (and good people) leaving.

    The Cameron “vision” is pathetic his compass clearly broken or vandalised by the LIBDEMs. By vision I do not mean the usual empty words. The country needs believable words and actions that people could trust for a change.

    • uanime5
      Posted July 18, 2011 at 7:35 pm | Permalink

      The problem with low taxes is that they result in low Government revenue, which causes additional problems.

      Two other problems you missed are:

      1) The lack of lending to businesses, which makes it difficult for businesses to expand and for new businesses to start up.

      2) The low salaries paid by employers means that most people have very little disposable income which results in less money being invested in the economy.

  2. stred
    Posted July 18, 2011 at 7:00 am | Permalink

    Your comment re. capital gains tax is absolutely right. I have just received a newsletter from the Southern Landlord’s Association pointing out the problems for people who have invested in what is in effect a business but having no tax relief or rollover possibilities.

    They own properties bought or inherited as a long term investment over 20 or even up to 50 years, but cannot sell and reinvest, transfer them or sell for a pension pot. If they do, the removal of inflation indexing means paying 28% on an unreal increase in value which would double the rate every 20 years and effectively confiscate the investment. As a senior partner in a large firm of accountants said- this is indeed legalised theft.

    The result is that no-one can sell a property held long term and every year that goes by 28% tax is due on the inflated value, which is being deliberately stoked to reduce real debt for the government and the majority of voters, who are not savers.
    The traditional conservative savers(of al political persuasions) have in effect been stuffed with a wealth tax by the banker’s boys, who of course pay, little CG tax as their gains are short term and often in the form of bonuses.

    Presumably, Dave and Dummy have worked out that by being ‘fair’ to the majority, the savers will just abstain at the next election and they will scrape back or retire to enjoy a profitable lecture circuit that will top up their generous pensions.

    Time to start the English Bitter Party.

    • lifelogic
      Posted July 18, 2011 at 7:35 am | Permalink

      The can roll over “defer” the capital gains in to a business under the “enterprise investment scheme” and get income tax relief too but the rules are a bit complex and restrictive but worth considering.

      • lifelogic
        Posted July 18, 2011 at 7:36 am | Permalink

        Individuals can I mean.

    • BobE
      Posted July 18, 2011 at 10:03 pm | Permalink

      The next election will default to labour because the conservatives have defecteted to Europe

      • lifelogic
        Posted July 19, 2011 at 2:21 pm | Permalink

        defected to Europe and big state socialism.

    • Mark
      Posted July 19, 2011 at 2:12 am | Permalink

      Quite right. Instead of being encouraged to sell, landlords are locked in until house prices fall so that at least some of their portfolio is at a loss to offset gains: this will only exacerbate the shortage of properties for first time buyers. CGT is now a tax on realising wealth. Most will find it cheaper to borrow against assets rather than liquidate them and pay the tax. Mr Shapps should have a word with Mr Osborne.

  3. Gary
    Posted July 18, 2011 at 7:03 am | Permalink

    Many here have been saying for a long time that growth will disappoint. How could it not ? The so-called growth that we had until 2007 was a crack up boom that was the result of the largest credit bubble in history. That is now unwinding, we reached debt saturation. No more debt could be absorbed. It seems the only people that could not see it is the govt, and that is also not surprising, after all, they failed to see the boom and failed to see the bust.

    Govt IS the problem.

    • lifelogic
      Posted July 18, 2011 at 7:50 am | Permalink

      Big and bad government is very nearly always the problem.

  4. Alison Granger
    Posted July 18, 2011 at 7:07 am | Permalink

    It’s remarkable that this government can plan to reduce the deficit by spending more money on the basis of highly speculative growth forecasts. Given the scale of UK debts spending should be cut every year until the books balance and debt can start to be repaid. That is unless they are actually planning on high inflation to get them off the hook?

    • BobE
      Posted July 18, 2011 at 10:05 pm | Permalink

      Alison, they are planning on 5 years and then jobs in the EU.

  5. Bill
    Posted July 18, 2011 at 7:08 am | Permalink

    If the markets decide that the UK cost of borrowing should rise, this will be a set back.
    Banks are still restricting lending, asking for increased interest cover ratios and a PGs on business that has good track records –

    • lifelogic
      Posted July 18, 2011 at 7:47 am | Permalink

      Indeed if rates rise with the now huge bank margins/fee too it will be very very anti growth indeed – that is if they lend at all.

  6. Mick Anderson
    Posted July 18, 2011 at 7:22 am | Permalink

    Most of us who read this blog understand this, but Mr Cameron and Mr Osborne appear to be intent on continuing the disaster started by Mr Blair and Mr Brown.

    At last years election, they were the ones who promised most on the economy, albeit by a slim margin. So if there were a repeat event this Thursday, on the assumption that UKIP is a wasted vote in Westminster, who could any of us vote for?

    It’s not as though the vast majority MPs do enough to hold the administration to account, and the promises of cuts, austerity and a “bonfire of quangos” have just been hot air.

    • BobE
      Posted July 18, 2011 at 9:36 pm | Permalink

      UKIP is not a wasted vote it is the only vote left to us

  7. Dr Alf Oldman
    Posted July 18, 2011 at 7:34 am | Permalink

    Rather than switch to a Plan B, could we not have a Plan A Risk Reduction Strategy? This approach would recognize the current or merging risks, with proposed mitigating actions.

    Overall, the integrity and determination of Plan A would stay with the above approach

    Dr Alf Oldman, Bath

  8. cronshd
    Posted July 18, 2011 at 8:30 am | Permalink

    John, in terms of cuts, we heard a lot at the start of this government about cuts in departmental spending. This appears to be fallacious. In particular, I wonder if there have been any reductions in the number of civil servants in some of the large departments in Whitehall which waste so much money. Are government ministers able to get a grip on this? I thought there were supposed to be massive job losses in the public sector. How many have there been in London government departments? I suspect pretty close to zero (apart from minimal natural wastage). Can you comment on this please John?

  9. Andrew
    Posted July 18, 2011 at 12:55 pm | Permalink

    Reduction in income and capital gains tax is all very well, but where is the revenue going to come from? At the moment, we tax employment and savings, inhibiting any form of growth. But property remains largely exempt. I would like John Redwood to comment a proper Schedule A property tax – of the kind advocated by Phillippe Legrain – with consequent reductions in income and capital gains tax to stimulate growth. Why should London become the foreign rich man’s tax haven to the detriment of the rest of us? It is absurd. In addition, I notice John Redwood has little to say about reducing regulation. If the Danes can hire and fire at will, backed by sensible government spending on retraining and finding new employment, why can’t we? I am sick and tired of the politicians blaming lack of any constructive measures to reduce regulation on Europe. It does not wash.

    • uanime5
      Posted July 18, 2011 at 7:44 pm | Permalink

      “If the Danes can hire and fire at will, backed by sensible government spending on retraining and finding new employment, why can’t we?”

      The problem is that the Government has no idea what to do with the unemployed. They offer no training, nor any education to help them find work. At present the only thing available is the Work Programme, a 2 year long course where the unemployed are shut away in a room all day long to remove them from the unemployment statistics. On this course the unemployed learn nothing and remain just as unemployable as when they started. Until the Government is willing to accept that doing nothing won’t work billions will continue to be wasted on these pointless programmes.

  10. Vanessa
    Posted July 18, 2011 at 1:36 pm | Permalink

    Why aren’t you the Prime Minister? Such sensible ideas need implementation not just hot air on a blog!

    • lifelogic
      Posted July 18, 2011 at 4:09 pm | Permalink

      Because such ideas are not in the interests of the parasitic sectors, the EU, the BBC, the bureaucrats or the powers that be. Only in the interests of the poor little voters.

  11. lojolondon
    Posted July 18, 2011 at 2:24 pm | Permalink

    Nice one, John, I wish we had a genuinely conservative (as opposed to Conservative) government, I would make you finance minister!

  12. David Price
    Posted July 18, 2011 at 4:54 pm | Permalink

    Your Plan B sounds much more sensible and achievable than the government Plan A, though like others I don’t see why proper efforts haven’t been made to actively reduce costs and the deficit from the very beginning rather than increasing them.

    Does the government actually have a Plan B, what is it and what are the trigger criteria?

  13. uanime5
    Posted July 18, 2011 at 7:47 pm | Permalink

    Is it any wonder that a plan based on high levels of growth has failed. Cameron seems to have only prepared for the best case scenario and has no clue what to do in a moderate or bad case.

  14. stred
    Posted July 18, 2011 at 8:13 pm | Permalink

    Reduce capital gains to 18% with indexation and the tax tax will increase greatly. Apply CG to inheritance valuations and there will be a lot of arson. People do not like being stuffed by government.

  15. David in Kent
    Posted July 18, 2011 at 8:42 pm | Permalink

    When Balls and his mates at the BBC speak of a Plan B I don’t think they mean more aggressive reductions in planned government expenditure, getting rid of the administrators of red tape and lower taxes. That is what is needed however as you point out.
    There are unfortunately some barriers to adopting Plan B but perhaps it should be spoken of as a threat to make them think better of Plan A.

  16. stred
    Posted July 20, 2011 at 12:53 pm | Permalink

    Sorry- tax take

  17. lindsay McDougall
    Posted July 23, 2011 at 8:29 am | Permalink

    As I was saying before the Office of Budget (IR)Responsibility so rudely interrupted, the only sane basis for fiscal planning is to assume a real GDP growth rate of 2.1% per annum, the average of the Thatcher, Major and Labour years. Yes, that figure includes the recessions. Why on earth shouldn’t it? Recessions are a necessary corrective, not anomalies.

    Plan B is to cut harder than in Plan A.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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