The chancellor must stop tinkering and face up to his UK deficit failure

TODAY is not going to be George Osborne’s finest day as chancellor – whatever he does and whatever he says. He is veering wildly off course in his plans to eliminate the deficit and to start to get our soaring national debt under some semblance of control.

As always, the first step to addressing a problem is admitting that there is one. The chancellor needs to do so, honestly and frankly, in his opening remarks this afternoon. Despite the ambitious rhetoric surrounding the comprehensive spending review back in 2010, the coalition has spectacularly failed to find measurable and meaningful savings. In broad terms, public sector spending will flatline over the course of this Parliament.

About £600bn – around £10,000 for every man, woman and child in the country – will be added to the national debt in Osborne’s fiscal splurge. If this is austerity, it is almost impossible to imagine what largesse would look like.

Of course, Osborne will be forced to concede that growth has been dismally lower than he hoped or expected. In setting up the independent Office for Budget Responsibility (OBR), it was the chancellor’s intention to ensure that forecasts and analysis were unsullied by political or governmental pressures. But on growth projections, at least, the OBR’s predictions have been more wildly optimistic than those of even the most determined of spin doctors.

No one doubts the OBR’s honest intentions and it certainly uses very impressive and intricate computer modelling. But if you’d followed my own forecasting model – taking the official numbers, halving them and rounding down a bit – you’d have been closer to the truth than if you’d relied on the OBR’s raw predictions.

But sluggish – even non-existent – growth reinforces the need for tighter fiscal constraint. If the chancellor does not have as much tax revenue pouring in as he’d like, he needs to cut his cloth accordingly, not merely borrow more and hope the problem goes away.

He could make a start by imposing a cash freeze on out-of-work benefits. These were uprated by over 5 per cent last year, while wages are struggling to grow by even 2 per cent a year. Many people at the lower end of the income spectrum are seeing no uplift in their pay packets. If the government is serious about making a life in work more financially beneficial than a life on benefits, it’s nonsensical to accelerate welfare payments more rapidly than real wage growth.

The chancellor should also revisit the issue of public sector pay. In a better, more efficient country, spending power would be much more devolved than in Whitehall-dominated Britain. But in the world we presently live in, the government could be forgiven for demanding a pay freeze for public sector workers. The Office for National Statistics – hardly renowned for it vehement bashing of the trade union movement – calculates that state workers earn around 7 per cent more than those in the private sector, even allowing for differences in skills, age and type of employment. Until this gap is bridged, it’s very difficult to justify further pay increases for those in the public sector to private sector taxpayers who foot the bill.

Osborne could also take a number of smaller moves to show he means business in stabilising the nation’s finances. It’s unlikely that the government will abandon its preposterous plan to grow the international aid budget, but surely it could at least call a halt to increased spending in this area until meaningful and sustained growth returns to the economy.

Action is also needed on the supply side of the economy. It’s futile for ministers to implore the private sector to create more jobs and improve productivity. A serious government retreat from burdensome red tape is urgently needed to assist businesses in reaching their potential. In particular, there should be swathes of exemptions from regulations for small and medium sized companies. So far, the promised bonfire of red tape has amounted to little more than a gentle smouldering at the edges.

Osborne should have set out a much bolder economic programme two years ago. It is notoriously difficult for governments to get braver as they enter mid term. Nevertheless, the grim economic circumstances demand radical action. Mere tinkering is no longer enough.

Mark Littlewood is director-general of the Institute of Economic Affairs.

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