The wide gaps in the pre-Budget report

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Written by Dr Madsen Pirie

Alistair Darling’s pre-Budget report revealed several huge gaps. For a start, the gap between what the government takes in and what it puts out has widened to £178bn. The Chancellor’s optimistic forecasts for growth after next year are not shared by City experts, some of whom put the future gap as a further £70bn higher than Darling says he expects.

There is another significant gap - between what the government says it is doing, and what will actually happen. This was very evident on the hot-button item of the one-off super-tax on bonuses. It sounds like bringing, what Labour call, the 'greedy' bankers to heel, but the small print indicates that it will not apply to any bonuses written into contracts, and will be limited to discretionary ones. Given that the effective tax rate would be above 100 per cent if the banks paid out the new 50 per cent surcharge, and the recipients paid out top rate income tax and National Insurance on top, it looks much more likely that many discretionary bonuses will be foregone for a year, with larger bonuses written into subsequent contracts to make up for it. This is political rhetoric largely empty of substance.

The biggest gap of all is between the government's strategic response to the crisis and what most expert opinion, here and abroad, thinks it should be doing. The government is obsessed with keeping up spending, thinking that a Keynesian-style stimulus is needed to prevent any recovery from being stillborn. The money raised from the middle classes in extra taxes is not being used to bring down the horrendous debts the government has incurred. It is being used to fund yet more spending, with increases announced in popular areas calculated to appeal to Labour voters.

In fact the biggest crisis facing Britain now is that overhang of debt. There is a real possibility that the UK could lose its top credit rating and be forced to pay much more to service its existing debt and future borrowing. The Conservatives, to their credit, recognize this. There have to be cuts - big cuts in spending - especially in the fripperies of politically correct but unproductive public sector activities. In place of spending increases there should be huge reductions, and in place of tax increases on jobs and enterprise, there should be targeted reductions to boost both growth and the tax revenues which follow in its wake. The government had a chance in the PBR to start to repair the nation's finances for the future. Instead one is left with the suspicion that they looked only six months ahead to the election, and left the hard decisions for afterwards.

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