You know the dilemma; you have a plaster; it needs to come off it will be painful. Do you take it off slowly prolonging the pain but reducing its intensity or do you take it off quickly with a sharp pain that will hopefully not last very long?
George Osborne’s answer to this was originally to take a plaster off very quickly so that the deficit was supposed to be eliminated by 2014/15, allowing for election winning tax cuts or public spending increases in the run-up to the general election. Then as the cuts bit harder, he postponed the surplus until 2019/ 20. Now the prospective surplus date has been put back to 2024/25.
It is fair to say that when the deficit soon stood at £155 billion, this was one helluva plaster! But it appears that the uncertainty regarding BREXIT is giving the government cover to postpone bringing the budget into balance by a decade.
At the IFS (Institute For Fiscal Studies) Green Budget event, the general consensus was that even this surplus target would be hard to achieve. With a unanimity that looked suspiciously like groupthink, the economists felt that postponing the surplus target was a good idea. When economists agree on something, it is normally time to question their assumptions!
All the warning lights were displayed at the Green Budget but curiously the speakers tended to ignore all what appears to be the most dangerous elements of future fiscal assumptions. The idea that we can have a recovery of nearly 14 years without paying a penny of debt would in another age seem rather reckless. There was also a concentration on spending within the NHS which has been ring fenced rather than the departments which have already been subject to substantial cuts and who may be at the limit of what can be reasonably expected.
The IFS pointed out that the continuing deficits were not because the government had not cut expenditure but because tax revenues in this recovery have not rebounded as fast as in previous recoveries.
With:
- the debt standing at 86% of GDP,
- taxes at 37% of GDP (a 30-year high)
- interest rates due to rise in the next couple of years
The government is facing a very severe challenge to its finances. The unanswered question was how far can the government let the debt increase and taxes rise before real harm is inflicted on the economy. As was pointed out, the government has been raising taxes for the last 15 years. It is unlikely to stop now and the next budget will undoubtedly see further substantial rises in tax. Not in headline rates but in other areas– with more complexity providing additional work for accountants and tax advisers.
Primondell will be running commentary on the run up to the Budget on 8 March and dissecting the fallout.
Jeremy is available for seminars after the Budget.
