Monday, March 29, 2010
Tories surrender the fiscal highground
Posted by David Smith at 12:30 PM
Category: Thoughts and responses

Having promised to get real about the budget deficit and scoffed at Labour's proposed efficiency savings, the Conservatives have shifted ground again. By promising to head off most of the rise in National Insurance contributions planned for April 2011, at a cost of nearly £6 billion, and making up the difference with efficiency savings, the Tories have seriously compromised their "sound finance" message.

Could a Tory party that promised to head off most of a rise in NI go ahead with a post-election VAT rise? Possibly, but it would look very dodgy. As of today, Labour's sketchy plans for cutting the deficit are more credible than those of the Tories. The Tory news release is here.

This is the Institute for Fiscal Studies on the Conservative plans:

"The Government is currently planning to cut public services spending outside the NHS, defence and overseas aid by 2.4% in 2010–11, after adjusting for whole economy inflation. We estimate that the additional £6 billion cut planned by the Conservatives would increase this to 5.1% and would leave these unprotected areas of spending 2.8% below the level planned by Labour. (The figures do not sum precisely because of rounding and we cannot be entirely precise about the declines until new 2010–11 Departmental Expenditure Limits are published in the Treasury’s next annual public spending statistics).

"The largest unprotected area would be schools. The impact of the spending cuts on people at different points of the income distribution would depend on where the axe falls. So we cannot say how the pattern of losses would compare to the patterns of gains from the NI cut.

"By cutting spending next year and delivering the tax cut a year later the Conservative proposal would take additional spending power out of the economy for a year at a time at which the recovery is likely to be at its most fragile. Combined with Labour’s existing plans, it would increase the discretionary fiscal tightening between this year and next to £29 billion or more than 2% of national income – significantly larger than that planned for subsequent years, even though the recovery should by then be stronger.

"The Conservatives claim that the spending cuts can, in effect, be rendered painless by efficiency savings that they say their advisers have identified. Whether or not that is true, using the bulk of these spending cuts to finance the NI cut means that they are not available to contribute to the task of reducing government borrowing that the Conservatives have set such store by. Reducing the deficit more quickly than the Government plans to will therefore require even greater cuts to public services spending, or to greater reliance on welfare cuts or tax increases that might be as economically costly as the NI increases they are seeking to mitigate."

Meanwhile, what Vince Cable describes as those "clowns" of the rating agencies are at it again. S & P has chosen the day of the chancellors' TV debate to reaffirm its negative outlook on UK sovereign debt. Confirmation, if it were needed, that they are using this as a marketing tool.