The Budget Deficit

Britain was given a choice in the General Election of May 2010 between three main political parties, all of whom were agreed on a need to reduce public borrowing and that cuts to public spending would play a major part in this.

During the Election, the differences between the parties were ones of scale and speed, rather than of overall direction. Most voters went for candidates who at least tended towards some caution. We got, though, a Government committed to the most drastic option.

The Labour Government planned to introduce £52bn of cuts by 2014/15 and to increase taxation by £21bn. The Conservative Government plans to have an extra £32bn in spending cuts and £8bn in tax increases.

David Wearing, of the New Left Project has written of these plans: “No precedent exists for such a massive and swift attack on the public sector of society and the economy, but what is clear is that many thousands of lives will be damaged, even ruined, in many thousands of real and personal ways, often irretrievably, as a result”.

Is there really no alternative? The Trade Unions are putting forward a case that there is – but that it is one which questions not only current Government policy but also the pre-election consensus.

Discussing the situation at its September meeting, the Trades Council felt that there were three key aspects.

In the first place, it was important that we should define ourselves as dealing not with a “deficit” problem, but with a cyclical economic crisis.

The cost of shoring up the finance sector was large, but what has really hit the public finances is the collapse of tax revenues contingent on the subsequent period of recession and slow growth. Tax receipts in 2009 to 2010 were £100bn lower than the Treasury had been predicting only two years previously.

Some genuine criticism can be made of the Labour Government’s economic policy prior to the cyclical crisis. Britain’s public finances in 2007 to 2008 were in a stronger position than they had been when Labour came to power in1997, but other OECD countries had done even more to benefit from successive years of growth. On OECD figures the UK had a structural budget deficit of 3.3% of national income in 2007 – the third highest of the G7 countries and the sixth highest of the 26 OECD countries for which data existed. 11 of these had structural budget surpluses.

Labour did attempt to use a greater proportion of borrowing to fund investment, but it kept its confidence in a low-regulation, finance sector driven model of the economy which left the country particularly vulnerable to a crisis working its way through this sector.

To speak of the current situation in terms of “the mess that Labour left” is, however, as Colin Talbot, Professor of Public Policy and Management at Manchester Business School, put it “self-serving nonsense from people determined “not to waste a good crisis” and use this one as an opportunity to “roll back the frontiers of the state””.

Whether you select historical or international comparisons there was nothing extreme or extravagant about Labour’s record. Public spending as a proportion of GDP was, in 2008, lower than the average level under the previous Conservative Governments and it was lower in Britain than in France, Italy, Austria, Belgium and the Scandinavian countries.

Labour’s flaws lay not so much with their management of the public finances as in its confidence in a conventional economic wisdom which started to collapse across all the OECD towards the end of 2007.

The second aspect of the situation we want to emphasise is that policy should be tested not by its efficacy in reducing the deficit but by its efficacy in restoring sustainable growth to the economy.

It is likely that a proportion of the public spending deficit will prove to be cyclical and that it will be reversed if growth recovers. The bulk of the British Government’s debt, moreover, is not short-term, with an average maturity period of 14 years.

As with any other financial markets there are strong psychological and political variables that can undermine any Government strategy. The markets should, however, have no major concerns about continuing to fund British Government borrowing so long as there is a national strategy for growth.

We tend to speak of “the banks” as the culprits of the credit crunch – but this is very much shorthand for the financial sector in general. Surely it would try public patience beyond endurance was this sector – having been the location of the crisis and then having been bailed out by the public – to make demands that the public sector be cut in the interests of the institutions which led the way over the cliff in the first place.

What is “sustainable” about any given level of Government debt is not a particular point along the line of borrowing as a proportion of public spending. As with many other things, there is a range of reasonable alternatives. Growing the economy can help “fix” the deficit. Simply cutting the deficit risks a self-defeating slide back into recession.

Our third area of concern is this: that even if there does prove to be a need for some fiscal consolidation it does not follow that the only tool to achieve this is public service cuts.

Whilst all of the main political parties entered the 2010 General Election on a platform of deficit reduction none of them offered the option of achieving this principally through increased taxation. Yet Britain is not a particularly highly taxed country. Prior to the economic crisis, taxes as a proportion of GDP tended to run close to the OECD average.

There is plenty of scope for changing the revenue/spending balance through taxation, and these taxes would be a more socially equitable means of doing this.

In June this year, for instance, the IPPR “Think Tank” produced a report which argued that the British financial sector could afford to contribute an extra £20bn a year in taxes, such as a Financial Transaction (“Robin Hood”) Tax.

The TUC has estimated that £25bn is lost to tax avoidance by wealthy individuals and companied each year and that a further £8bn is used up in tax allowances and reliefs.

We also need, as a nation, to release politicians from their fear of even mentioning Income Tax. Of course, we don’t like Income Tax, but if we are to have a mature dialogue about the sort of society we wish to create then the question of levels of personal taxation must play a part in this. There is surely scope for a rise in the basic rate?

In addition to possible tax revenues, we should also be willing to examine whether there is the possibility of using the financial assets effectively nationalised in order to shore up the financial sector. The Government should look to have a much more directional control over these, as opposed to the “hands off” approach adopted in the establishment of UK Financial Investments Ltd.

Whilst we fully support the TUCs efforts to build a major social campaign against the cuts we agree with the observation of Seumas Milne, in the “Guardian”: “Opposition to [the] cuts has to be underpinned by a political campaign to win the economic argument against austerity”. Campaigning may help create a climate in which such a new politics emerges. In the final analysis, though, our future will depend upon whether or not the public sees through the decoy that the cuts are inevitable and necessary.