Today is a big day for George Osborne. As things stand, Britain has the biggest budget deficit in the developed world, with the government borrowing about £18m per hour, 24 hours a day, all year long. Market confidence has held this far only because people are expecting this emergency budget to set in motion tough spending cuts that will bring the deficit down much faster than previous Treasury plans. If the government fluffs this budget, a Greek-style crisis might not be too far away.
Not that I expect Osborne to get things that wrong. On the contrary, the government seems committed to the kind of serious cuts and far-reaching reforms that are necessary to eliminate the budget deficit by the end of this parliament. That is their stated aim, and I salute them for it.
The first thing I’ll be looking for today is whether the government is prepared to go far enough with their cuts, or whether political timidity will get in the way. The IFS says we need fiscal tightening of £85bn to balance the budget. But that’s a bare minimum – any less than that and the government is not going far enough.
I’m also hoping that the government will recognize that when the fiscal challenge is this big, we can’t afford to ring-fence anything. This applies as much to the NHS as anything else. After social security, it’s our biggest area of spending, costing over £100bn a year. Real-terms spending has doubled in the last 10 years, while productivity has fallen, so (as I argued here) the scope for savings is significant.
Then there’s the nature of the cuts. The starting points are obvious: public sector pay and recruitment freezes, bureaucratic redundancies, means-testing previously universal benefits, and freezing others. But as Eamonn has pointed out, that kind of approach will only take you so far. In the long run, we need to completely re-think the role of government. This needs to be a ‘reform’ exercise as well as a ‘cuts’ one, and the comprehensive spending review needs to be a genuinely zero-base exercise.
And then there are taxes: the government say they are going to plug the fiscal black hole with 80 percent spending cuts and 20 percent tax rises. But I don’t think we need tax rises at all – the deficit can and should be eliminated through spending cuts alone. Moreover, tax rises may dampen our growth prospects and make balancing the books even harder.
Ultimately, as well as cuts, and as well as reform, the government needs an agenda for growth. And that doesn’t mean a return to central planning and industrial activism; it means cutting taxes and freeing entrepreneurs from red tape. There’s no question this is a massive task. Let’s see how the Chancellor does.