Cut business taxes and public spending to stave off UK bankruptcy

Tuesday 4 August 209

Across-the-board cuts in government spending and reductions in business taxes are essential if the UK is to balance its books and stave off bankruptcy, according to a think-tank report published today. The Adam Smith Institute says that an incoming Conservative government will have to draw up a 'Medium Term Financial Strategy' to convince investors that it is serious about bringing the public finances under control and being able to pay off the country's mountain of debt.

Balance the books

The report, by the City analyst Nigel Hawkins, says that the public finances are out of control. The government aims to borrow £175 billion this year, and to continue borrowing, until its total debt reaches £1,370 billion in 2013/14 – some 76% of the nation's income.

But the reality is worse. The government's figures ignore the £37 billion capital injection into the banks, and the £585 billion of bank liabilities now underwritten by taxpayers. And the IMF and other leading economists say the government's growth forecasts are far too optimistic.

The Institute concludes that it is quite possible that Britain could go broke. This year the it hopes to issue an unprecedented £220 billion of gilt-edged securities, and to treble Treasury IOUs up to £65.5 billion. If investors get worried, this financing plan will fail and Britain would be forced to ask the IMF for a bail-out.

The next government should admit that borrowing is far too high, draw up a Medium Term Financial Strategy to restore stability, and focus on retaining the UK's Triple-A credit rating.

Cut public spending

Hawkins points out that the level of public spending has soared, to £671 billion this year. Extra welfare payment because of the recession may push the figure up even more. If the government's books are to be brought back into balance, public spending must be cut. Private-sector employees, who have seen their own wages and pensions cut, resent the privileged position of civil servants, creating political pressure for government thrift.

The next government should aim for real reductions of 3% or more over the medium term. Across-the-board cuts over an extended period would gradually return the public finances to balance.

Commit to lower taxes

Taxes have also risen substantially, and need to be reduced and simplified in order to generate economic growth, says the report. Across-the-board tax cuts will not be feasible until expenditure cuts begin to stabilize the public finances. However, swift cuts in corporate taxes, and reductions in other business burdens, are essential in order to boost the UK's competitiveness.

The next government should pledge to cut taxes once the public finances are under control, reduce corporate taxes in order to promote investment, and reduce and simplify income tax and NI to promote employment.

Other priorities

The next government should also:

  • Closely control the money supply and commit to sound money.
  • Privatize functions such as water utilities, broadcasting, the postal service, and transport.
  • Reduce public sector pension liabilities by closing over-generous schemes to new members.
  • Restore honesty into PFI deals, which are currently not counted on the government's balance sheet.
  • Radically improve the management of public procurement to reduce cost and time over-runs.
  • Overhaul bank supervision, and stress-test the large banks to forestall a future crisis.
  • Progressively reduce government guarantees to the banks and sell its bank shareholdings.

Media Contact

info@adamsmith.org

07584 778 207

0207 222 4995