BANK OF ENGLAND governor Mervyn King yesterday hailed the new coalition government’s plans for an immediate £6bn cut in public spending to tackle Britain’s record peacetime deficit, saying it was imperative that Britain’s fiscal problems are dealt with sooner rather than later.
Breaking from his traditional silence on fiscal policy, the governor said he had been asked publicly by the new Conservative-Liberal Democrat government to give his advice. He called the measures desirable and said they diminished the downside risks to the Bank’s growth forecasts.
Describing the measures as “strong and powerful”, he added: “I am pleased that there is a clear and binding commitment to accelerate the rate at which the deficit is tackled. It doesn’t make sense to run the risk of an adverse market reaction.”
Some bodies, such as the IMF, have warned that cutting the deficit too soon, risked choking off the nascent economic recovery.
The immediate cuts won support from the business lobby. The CBI said: “We welcome the significant acceleration in the reduction of the structural deficit.”
The Institute for Directors’ (IoD) director-general Miles Templeman said: “Implementing this policy will not be easy. We remain convinced that the overwhelming burden of adjustment should fall on lower public spending not higher taxation.”
But Robert Chote, director of the Institute for Fiscal Studies (IFS) warned that the agreement, which endorses the Tory plan for year-on-year real increases in NHS spending and a large real rise in overseas aid, pointed to “an intense squeeze on the budgets of other Whitehall departments in the spending review due this autumn”.
It also left open the option of tougher spending cuts and didn’t rule out significant net tax hikes, Chote added.
AT A GLANCE
● DEFICIT REDUCTION
The parties both agree that reducing the national deficit is the most important thing facing the UK.
They will aim for a “significantly accelerated reduction in the structural deficit” over the next five years. They both agree the brunt of the cuts should be paid for by reduced spending, rather than increasing the tax burden.
The sides have agreed that those on low incomes should be protected from the effects of pay constraint. They also believe that the scrapping of the National Insurance hike proposed by Labour will help protect jobs.
Perhaps the most significant announcement is that an emergency budget will be called within 50 days of Cameron forming his government. They will also set up an Office for Budget Responsibility to carry out independent growth and borrowing forecasts.
They plan cuts of £6bn this year.
● SPENDING REVIEW
A full spending review will be immediately started, dUe to report this Autumn.
Funding for the NHS will increase in real terms each year for the next five years. Planned spending on overseas aid will also remain in place.
There will be a “significant premium” for poorer school children which will be paid for in spending reductions elsewhere.
The parties will also begin a defence review but will remain committed to the Trident nuclear deterrent. The government will play an active roll in international talks regarding nuclear non-proliferation.
Personal allowance for income tax will be increased to help middle- and low-earners. This will be partly paid for by increases to capital gains tax rates for non-business assets. This will take precedence over the Tory plans to increase the threshold for inheritance tax.
● BANKING REFORM
A banking levy will be introduced.
The parties also say they will produce detailed proposals to tackle the problem of “unacceptable bonuses” in the City. In a bid to introduce more competition to the sector, there will be moves to promote mutuals.
Schools will have greater freedom over the curriculum and be held properly accountable.
The parties say they will cap non-EU economic migration numbers, although the limit has yet to be worked out. The Lib Dems won an end to child detention for immigration purposes.
● POLITICAL REFORM
Five-year fixed terms are in, although an election can be called if more than 55 per cent of MPs vote to dissolve parliament.
We can expect a referendum on Alternative Vote electoral reform, a committee on overhauling the House of Lords, and a “radical devolution of power and greater financial autonomy” to local councils.
There wil be no further transfer of sovereign powers to Brussels over the course of this parliament.
Highlights are the establishment of a high-speed rail network, the cancellation of Heathrow’s third runway and a block on any further runways at Gatwick and Stansted.