Back in March 2010, I argued that the budget delivered by Alistair Darling not only failed to map out a credible plan for Britain to stabilise its national debt but that it had also further contributed to the turning of Britain into a ‘conflict economy’ – meaning slow growth and slower living standards for all. I argued that what Britain needed was a plan to heal our conflict economy, cut our national debt and get our economy moving – I firmly believe that this Budget offers a credible plan to do just that. I also said in my last post that that the Conservative party recognised that in the longer term, competitive tax rates are vital to make Britain a good place to live and do business. Whilst it is true that overall taxes have had to rise as the Chancellor tries to plug the massive hole at the heart of public spending, the proposed reductions to the corporation tax rate show at least that the Coalition Government is committed to Britain being a good place to run a business.
This government has inherited a dire economic legacy
- public spending in Britain has risen to 51.7% of GDP, a level most Warsaw pact countries would have been proud of;
- public sector net borrowing is due to remain (without further action) at 4 per cent. of GDP in five years time; and
- the structural deficit is due to be 2.8 per cent. by 2014-15 and debt payments are set to reach £67 billion in that year.
Britain is running out of money and the markets are nervous. To respond to Labour’s accusations that this government is driven by narrow ideological dogma rather than economics, I just observe that there is nothing progressive or decent about bankrupting the country. The country simply cannot go on spending money it can’t afford and doesn’t have, and if it does so, the vulnerable will be worse hit as spending on essential services is summarily slashed, interest rates rise and the job market collapses.
In the circumstances, Mr Osborne and his team had to balance the desperate need to reduce the deficit together (thus reassuring the markets) crucially with ensuring the steps taken do not hamper the economy and threaten the fragile recovery.
This is why I think the Chancellor’s budget is a progressive success:
1. The Government has explicitly recognised that enterprise is key to rebalancing the economy. I likened the approach of Gordon Brown in government to that of a frenetic signalman in Thomas the Tank Engine – as revenues collapsed the levers of government spending were pulled wildly back and forward in a desperate attempt to keep the economy moving, the term “economy” was assumed to be the “state”. Leaving CGT aside for the moment, this government recognises that growth needs to be based on an expansion in the private sector. With increased private sector growth, tax receipts increase and the government will be able to sustain necessary public spending on services that are relied upon by the most vulnerable in our society.
2. The budget is fair in asking higher earners to bear the lion’s share of the deficit reduction. The British public recognise by and large that taxes simply have to go up in the short to medium term to pay for Labour’s profligacy and waste. It is right that higher earners bear the brunt of the pain, whilst at the same time it is important that the government’s measures do not drive our wealth creators away. High earners in the main recognise that. The increase in the personal tax allowance is a step in the right direction to the best Lib Dem policy of the campaign (that the first £10,000 of income should be tax free), the CGT increases do not hit the lower rate taxpayers and the government has committed to the VAT exemptions on essential items. Despite the crowing of the Labour party therefore, the wealthy and purchasers of luxury goods will bear the brunt of the regrettable but necessary VAT rise.
3. Public sector cuts are to be phased and benefit reforms protect the vulnerable. As John Bird, founder of the Big Issue has observed, there is nothing kind or decent about encouraging a culture of welfare dependency. It may have suited Labour to have created a client state but it is clear to almost everyone that the benefits system needs radical reform and this government is taking the first steps. Pay restraint in the public sector will ultimately protect jobs whilst lower paid public workers will receive additional help. The restoration of the link between the state pension and earnings has to be right, as does the increase in the age of the state pension in a society where people are living longer than ever before. Finally, and most importantly, the entirety of the necessary cuts will be spread over a period of four years – the Chancellor is not cutting too quickly and too deeply – it is a responsible programme that should not threaten the fragile recovery.
There is much work to be done and the public sector cuts that lie ahead are going to be very painful. As the government embarks on the difficult journey that lies ahead a core commitment to reform our public services whilst protecting the vulnerable must remain at the heart of the Coalition’s philosophy – tackling waste whilst protecting key services is a progressive policy.
No one sector should be spared from the difficult decisions that need to be made and from being forced to embrace new efficiencies but this government has shown a clarity of purpose in its first budget and George and his strong team are clearly ready for the challenge. A brave progressive start has been made, laying the foundations for healing our conflict economy and a return to economic growth.
Marcus Booth is Chairman of Conservative City Future
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