Further Steps Towards Deficit Reduction
Monday 26th June 2012: The Emergency Budget in June 2010 set out a necessary plan to eliminate an unsustainable structural budget deficit.
Since then it has become clearer that previous estimates of the trend rate of GDP growth were too optimistic. Meanwhile The Office for Budget Responsibility (OBR) has reduced its estimate of the economy’s potential growth rate.
To ensure that the structural budget deficit is eliminated, the Chancellor has indicated that further discretionary reductions in spending will take place. These, he has indicated, will be concentrated on reducing social security transfer payments.
The decision to align public sector pay more closely with local labour market conditions is economically significant. It is an important step towards improving the working of regional labour markets. The Government should now take a similar approach to social security payments paid to people of working age. It should move to a system where they are set in a manner that better reflects local labour market conditions.
The political desire to remove tax allowances from incomes over £100,000 and to remove Child Benefit from higher income earners has created a perverse structure of marginal tax rates across the earnings distribution with complex and malign implications for labour supply.
*Warwick Lightfoot is an economist and has been Special Adviser to a previous Chancellor of the Exchequer. He is the author of Politeia pamphlet For Better or for Worse: The Economic Record of the Labour Government.