The 2013 Budget seemed a cheerful affair on the day, but even then the cheer did not come cheap. The freeze in the annual ‘escalator’ duty on fuel and beer may have pleased backbenchers and made for a populist touch; the £1,200 for childcare for working parents may bring Mumsnet on-side; the guarantees for mortgage lending and loans for homebuyers, along with a capital injection of £3bn to encourage house building may indeed fuel a ‘boom’. Together with the tiny cuts across Whitehall (one per cent) and none for health and education, these give-aways cost more than the price-tag, or even the money borrowed to pay the bill and interest. They come at a deep, debilitative cost to the taxpayers, individuals and businesses whose incomes are being squeezed by the cocktail of tax and charges levied by HMG to pay for its public spending (which absorbs almost 50 per cent of UK GDP) and debt to the tune of more than £1 trillion. They mean that business and individuals – those who earn the money – are left with little or nothing to spend or save, once they have paid for the cost of existing (the overhead for food or supplies, mortgage or rent) and HMG’s costs (income and corporation tax, NICs, local council charge and business rates). The reduction of corporation tax to 20 per cent by 2015 is a step in the right direction, as are the proposed cuts to NIC contributions for some small employers. But these are small steps; bolder strides to cut the cost and size of the state are needed.
Of course the Coalition inherited a dismal balance sheet from its profligate predecessor; and another spell of Labour’s fiscal irresponsibility would probably finish off the UK economy. But if the Coalition is to meet its declared intention of ending the deficit and the debt which according to the government will peak at around 97 per cent of GDP in 2015, a more rapid reduction in levels of public spending must take priority over rousing a few cheers. Indeed a tougher, more rapid course of cutting public spending levels is more likely to lead to recovery sooner than any number of alternatives to ‘kick start’ the economy (see Going for Growth by Ludger Schuknecht, 2012). The evidence from ‘crisis’ economies who have ‘been here’ before is that growth results more surely from public spending and tax cuts than from the cruder fiscal courses touted by the critics. They also allow for the public spending on social ‘goods’ like healthcare and education which people want, so long as the system encourages any number of good providers to compete. Whatever the case for serious infrastructure spending, there is none for adding more ‘rent’ (or interest) groups and cash subsidies (see Realistic Recovery: Why Keynesian Solutions Will Not Work by Vito Tanzi, 2012). Like the Welfare Bills, they can only go up.
Once public spending comes down, the debate can take off and we have invited some of Politeia’s economic authors to consider the issues and the economic implications of the 2013 Budget in the weeks to come.
*Dr Sheila Lawlor, Director of Politeia