The Institute for Fiscal Studies (IFS) have predicted that “there is a better than 50-50 chance that the government will borrow more this year than it did last year.” The cause is our stagnant economy, in the face of which the Chancellor has chosen to neither raise taxes nor cut spending to make up the shortfall.
The Spectator has dubbed this the “St Augustine approach to deficit reduction: ‘Lord, let me balance the books but not yet’”, and the policy has already resulted in Citi warning that Britain is on track to lose its triple AAA rating within 18 months.
So what can the Chancellor do? Continuing to borrow is not an option – analysts have highlighted that if we continue on our current trajectory, the debt: GDP ratio will hit 100% by the next election, up from 43% in 2007/8, hence the loss of the AAA status. It’s only a small step from there to national bankruptcy.
Osborne will be under considerable pressure to raise taxes to make up some of the shortfall, but politically and economically this could be disastrous. We all know that tax cuts are popular, after all, no-one wants to pay more money to government than they have to. The Chancellor has already made much of the tax cuts planned for 2013 “putting money back in peoples’ pockets”, yet the IFS points out that this only amounts to an average of £33 per household. And some taxpayers won’t even see that amount – under the planned tax reforms the hardest hit will be the highest earners. As the top half of taxpayers already contribute 85% of the tax revenues, one wonders how much longer the Treasury can heap tax rises on this half of society without any fallout at the ballot box.
Moreover, the meagre gain must be offset against the 254 tax rises that we’ve already seen since the Coalition took charge – rises amounting to £1,360 per household on average. The Taxpayers Alliance recently highlighted that “receipts are projected to rise from £513 billion in 2009-10 to a projected £671 billion in 2015-16. Even after adjusting for inflation that’s an increase of 15 per cent”. Householders across the land have noticed that whilst government spending continues to rise they have noticeably less money in their pockets. That’s not a combination that wins elections, no matter how often a Chancellor assures the electorate that it’s worse for the very rich. Many of the people he includes in the ‘very rich’ don’t feel very rich.
Yet Osborne clearly either feels that tax rises are less toxic than government cuts or he’s become a Keynesian, as he’s front loaded the tax rises whilst pushing cuts further down the line. From the IFS report: “By the end of 2012–13, 79% of the planned tax increases and 67% of the planned cuts to investment spending will have been implemented, while just 32% of the planned cuts to benefit spending and 21% of the cuts to day-to-day spending on public services will have been delivered.”
The IFS report also goes on to say that, if the deficit is to come under control, and if the ring fences of the NHS, education and overseas aid stay in place, budgets in all other departments will have to be cut by a third. Most of the cuts so far have been to staffing levels, with 300,000 public employees let go to date. So far the approach has been to salami slice spending, in other words, to cut every department equally.
But might it be more electorally palatable to take a different approach? There’s no doubt that the electorate supports some state spending more than others, that’s why we have ring fenced budgets in the first place. There is also no doubt that, even if one were minded to take a broadly Keynesian approach to the economy, some spending (the sort of shovel ready projects which create jobs) would still be prioritised over others. So it seems to make little sense to apply a blanket reduction to all Whitehall budgets equally.
The Royal Borough of Windsor and Maidenhead unitary council is due to cut its council tax by 3% this month, contributing to a real terms decrease of 11.6% since 2010/11. By restructuring its services and focusing on efficiency it has not only managed to reduce taxes but also increase its financial reserves, open a new library, open a new museum, invested £4.85m on improving schools, and a given pay rise to the lowest earning 40% of its employees. They have managed this extraordinary feat precisely because they didn’t simply salami slice their budget, instead choosing to focus on how to make the most efficient use of their budget, and incentivising the public to help (for example, residents who recycle are given credits according to how much they recycle to be spent locally. This has saved the council £100k in landfill taxes). Unsurprisingly this approach has gained swathes of support from voters, with the Conservatives increasing their hold on the council in election after election.
I’m sure everyone would have their suggestions as to where cuts might best be made. Personally I would axe the BBC immediately, not least because in an era in which newcomers to the TV market are coming thick and fast, the arguments in favour of a taxpayer subsidised broadcasting corporation are looking increasingly shaky. (In fact, while we’re at it, why do we have a department of culture and media at all?) Arguably local government is far too sclerotic; certainly there are far too many layers. Not a single person I have met in my time as a District Councillor understands the difference between us and the County Council, certainly they don’t know how the responsibilities are divided. So why are we paying for Chief Executives of the County Council and all the local District Councils? I’d also ditch all the subsidies for so-called green energy, not least because it would achieve the double whammy of bringing energy prices down. Taxpayer funded union activity could go tomorrow without a huge backlash from the vast majority of taxpayers. And of course we could save billions a year by withdrawing from the EU. But one thing is for sure: instead of asking ‘what should we cut?’ we should be asking ‘if we were starting from scratch, what would we have?’ Everything not on that list should be dismantled.
Yes, there would be vested interests in each of these sectors who would argue for the status quo, but by stripping out all unpopular government spending and reducing other strategic areas in an efficiency drive, government could be made leaner and more effective. Crucially, by protecting the services that the public value, the government would find it easier to make the case for cuts elsewhere, all without having to talk down the economy by lamenting over ‘painful austerity’.
This approach won’t fix two key problems: the rising cost of welfare (although more money in the private sector would lead to job creation), and what to do about an ageing population in an era that has grown used to generous pensioner benefits. But it will at least get us onto a much more stable footing from which to face these twin challenges, and it might even get the economy growing again too.