The Resolution Foundation’s Parliament of Pain event last week drew in a big crowd. Its chief economist Matthew Whittaker started off with the caveat that “we are facing a candour deficit as well as a fiscal one”, meaning that none of the major parties has been clear about its plans and what little they have said is confusing and often contradictory. Trying to predict what they might do after 2015 is therefore no easy task.
Nevertheless, the folk at the Resolution Foundation have looked back over the politicians’ recent utterances and made a pretty good guess. Based on the meagre information the parties have given, they have worked out what the implications would be for public spending and deficit reduction over the next parliament.
They haven’t included the Conservatives’ tax cuts in these calculations, though. Here’s why:
The Conservatives also propose £7.2 billion of income tax cuts by 2020 – raising the personal allowance to £12,500 and raising the higher rate threshold to £50,000. It has not been made clear how this would be paid for, though the indication is that it would be via additional spending cuts. However, there is no timetable for delivering these tax cuts within the parliament. They might for instance be delivered in 2019-20 or 2020-21, rather than the years analysed in this report. For that reason, we do not model the implications of these tax cuts in Section 4. It is worth noting however that, were they delivered earlier – in part or in full – the squeeze on departmental and welfare spending that we present would be even tighter and even harder to deliver.
Which is about as close as you can come in a polite think tank report to saying these tax cuts are a fantasy piled on top of a delusion and not really worth more than a passing mention.
Onto the real stuff then. On this handy chart, they have mapped out the likely spending plans of the three main parties.
It looks about right. The Tories more gung-ho about cuts, Labour much less so and the Lib Dems somewhere in the middle
The analysis takes the £8.5 billion cuts planned for 2015-16 as read. The budgets will have been set by the time of the next election, so the figures on this chart are based on what happens afterwards.
The key difference between the Conservatives and the others is that they are aiming for an absolute surplus by 2019. The other two parties are aiming for a current surplus, which means being able to fund day-to-day spending from revenues, while still borrowing for capital spending. (Incidentally, the report has an excellent appendix explaining government finance and all its terms and acronyms, which is well worth reading.)
Taking longer to reduce the deficit and continuing to borrow for capital spending gives the other parties a lot more room to manoeuvre. For example, by extending the target for a current budget surplus to the end of the decade and borrowing for capital expenditure, a future government would only need to make a further £4 billion in cuts after 2015-16. And that figure includes the increased debt payments brought about by higher borrowing.
Using the OBR’s projections for growth and tax revenues, the Resolution Foundation reckon that this would still enable a government to run a small current surplus by the end of the decade. It would be much a slower reduction than the one the Conservatives are advocating but the overall debt-to-GDP ratio would still start to come down by 2020.
It is highly likely that the ‘Coalition frontier’ will shift to the right anyway because £37 billion cuts in the 3 years after 2015-16 is nigh on impossible without dismantling large parts of the state and there is no public appetite for doing that. Either the target will shift or some of the deficit reduction will come from tax cuts.
But the Resolution Foundation’s model suggests that a future government could cut spending a lot more slowly and still start to reduce the debt-to-GDP ratio by the end of the decade. Why is it so important to start the process so much earlier?
Simon Wren-Lewis, who spoke at the Resolution Foundation event, reckons it isn’t. We were, he says, bounced into austerity in 2010.
“Debt must be reduced because the markets will punish us otherwise.”
This is a plausible excuse for austerity in 2010, because of what was happening in the Eurozone, but as an IMF evaluation has recently acknowledged, the Eurozone was a false alarm which shifted policy in the wrong direction. There never was a ‘clear and present danger’ that the UK might become like Greece, and there certainly is not that danger now.
The Chancellor must know full well that a more modest pace of debt reduction from 2015 will not lead to any market panic. It might lead to higher long term interest rates, but that will only be because the markets expect additional growth from less fiscal contraction (and therefore an earlier tightening of monetary policy), and that would be a good thing. There is no way markets will react to a more modest pace of debt reduction by starting to think the UK will default! He should know this because he allowed a more modest pace of debt reduction from 2012 (see below), and the markets did not blink an eyelid.
A deficit of 3 percent of GDP, he says, is sustainable in the short-term and Labour’s (presumed) target is well within that. Why impose £37 billion of spending cuts (or tax increases) which could put the recovery at risk?
It’s not as though government borrowing costs are high at the moment. Although public debt as a percentage of GDP is roughly double what it was in the mid 1990s, the cost of debt repayment is still lower. Borrowing is nowhere near as expensive for the government as it was 20 years ago.
Chart: Via Economics Help
But surely, say the deficit hawks, you should pay your credit card bill off as soon as you can. If we are going to use a household analogy, though, mortgage payments would be a better one.
Let’s say you decide to pay off your mortgage more quickly but to make the payments you have to stop eating for a few days here and there. Over time, this makes you tired and ill, so you take more time off work and start losing pay. The whole exercise then becomes self-defeating. If you’d kept eating and kept earning, you’d have paid your mortgage off eventually anyway.
Taking £48 billion out of public spending over 4 years will certainly make the public sector sick and could well derail the whole recovery. In the current climate, taking a few years longer to reduce the deficit wouldn’t cost us that much more and would save a lot of pain.
I am struck by how things have changed. Less than five years ago, economists were convinced that high debt and deficits were disastrous and governments must turn their attention to deficit reduction: growth would magically happen once public finances were “restored”. Now, it seems economists are far less concerned about deficits and debt, and much more worried about growth, than politicians are. In August this year, Nobel laureates at Lindau and central bankers at Jackson Hole called for large-scale public investment, particularly in education and training. Were politicians listening? No. Major public investment is not on the agenda anywhere. Debt reduction and “balancing the books” is fashionable across the political spectrum, even if it means consigning an entire generation of young people to the scrapheap. Older voters, it seems, have not yet understood that their security in retirement depends on having a fully employed, high-earning workforce in the future. Wrecking the prospects of young people in the name of deficit reduction is folly.
So why do it then?
The absolute surplus by 2019 was something George Osborne dreamt up last October. It has the feel of a vanity deadline. Vanity deadlines are a subset of vanity projects. I’m sure many of you will be familiar with them. It’s when your boss tells the board, “We’ll have it sorted by Christmas” or “It’ll be in by the end of the financial year,” with no other rationale than a memorable date that makes him look good. You and your colleagues then spend your evenings and weekends rushing to meet a deadline that has no benefit to the business and might even expose you to considerable risks, just because your boss doesn’t want to go back to the board and admit that he might have been a bit hasty.
Is an absolute surplus by 2019 just such a vanity project? Could we be about to dismantle our public services and put the recovery at risk just to meet an arbitrary deadline? There appears to be no rationale for the 2019 deadline apart from it simply being the date that the Chancellor has picked. As far as I can see, it’s a lot of pain for not a lot of gain. Or, as one of my lecturers used to say, the view isn’t worth the climb.