Plan A died long ago: Five facts to remember ahead of tomorrow’s Budget

 
Ryan Bourne
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FRONTLINE ECONOMICS

AHEAD of the Budget, many reports suggest the chancellor will largely plough an “unchanged course”. For some this represents inflexibility – an inability to escape from a sado-cuts programme that started in 2010. But in light of such claims, it’s worth remembering five key facts.

First, Plan A died long ago. In 2010, George Osborne promised to eliminate the structural current deficit within five years; and get net debt falling by the end of the Parliament. His plan was, however, reliant on assumptions about healthy tax revenues. Yet tax revenues have significantly underperformed expectations. Faced with the choice of more cuts to close the deficit or more borrowing, the coalition has opted consistently to slow the rate of deficit reduction and has now abandoned the net debt rule altogether. The plan can therefore no longer be described as Plan A or even a “deficit reduction plan”.

Second, our deficit is still at an extraordinarily high level and has actually been rising again. In 2011-12 the government borrowed £121.6bn (about £5,000 per household), or 8 per cent of GDP. Once one-off factors have been stripped out, the underlying deficit is up this year and PwC suggests it will exceed government forecasts by £8bn.

Third, over £600bn will be added to public sector net debt over the course of this Parliament. On current forecasts, this means gross debt at almost 100 per cent of GDP by 2015-16. The work of economists Ken Rogoff and Carmen Reinhart has shown that these debt levels are typically associated with two decades of much slower growth (with annual growth typically 1 percentage point per year lower).

Fourth, planned spending cuts are not incredibly deep. The Treasury’s Public Finances Databank shows overall total expenditure in real terms will fall by just 3 per cent over the course of this Parliament, compared to a 62 per cent rise during the New Labour period in office. Ring-fencing and the increased burden of debt interest payments mean certain areas will see substantial cuts – but borrowing more would add to the latter, while the government continues to wrongly protect departments via the former.

Finally, so far the bulk of fiscal consolidation has come from front-loaded tax rises and investment cuts, when economic evidence suggests cutting ordinary government expenditure is the least harmful way to cut deficits and has the most beneficial medium-term growth effects. The real concern is that political difficulties or can-kicking into the next Parliament will mean much-needed current expenditure cuts are not seen through.

Far from being rigid, inflexible and implementing deep cuts, Osborne has pushed deficit reduction back, plans modest overall cuts in this Parliament, and has lowered the deficit so far only by raising taxes and cutting investment. But continued stagnation makes it more obvious we need steps to improve medium-term growth – and one means is cutting the public sector more deeply, alongside substantial supply-side and pro-competition reforms.

Ryan Bourne is head of economic research at the Centre for Policy Studies.