Guest blogger – Roger Nightingale
The British economy has to contend with two major problems at the moment: a quickening rate of inflation and a deteriorating fiscal deficit. The cause of each seems to have been public sector indulgence. The remedy for each will be public sector austerity.
In 2010, the Chancellor made a start, but only a start. He appeared to be tougher than he was. In last year’s budget, he spelled out spending cuts that would become effective only after months of delay. Unsurprisingly, having been left unattended, deficit and inflation both got worse.
Will things come right this year? Has the Chancellor done enough? Probably not. Even on his (optimistic) forecasts, the deficit will still be huge in four years time. On alternative (realistic) forecasts, it’ll be a lot worse.
Might he come back for a second bite of the cherry, therefore? Unlikely. Tough decisions have to be made in the first year of a term. Political resolve weakens as time goes. As attention shifts to the re-election campaign, the capacity for backtracking rises sharply.
What the Chancellor will want in the next couple of years is an economics revival. He’ll want to see living standards improving and the popularity of his party therefore rising. Is that what he’ll get? Probably not.
The economics cycle is not going to be helpful. Its periodicity is about 5½ years. Its last trough occurred in December 2008, and its next peak is consequently due in autumn 2011. Currently, we are still achieving growth, but at progressively slower rates. The moderation will continue for some time. Next year, there may be negatives, possible severe ones.
In any event, the growth will be insufficient to generate the tax revenues needed to fulfil official deficit improvement expectations. In his current budget statement, the Chancellor reduced the estimate for GDP growth in 2011. He may well have to do so for 2012 and 2013 as well!
And the electorate won’t relish protracted austerity. People don’t yet appreciate the extent of the mess into which the economy has been plunged. They might be prepared for a couple of years of difficult times, but not for five or even ten!
Who’ll be blamed? Incumbents rather than instigators! Memories of the awfulness of New Labour will fade. Appreciation of the awfulness of New Conservative will rise! There’s a better-than-evens chance that the next election will bring a return of the status quo ante.
Could the Chancellor have done a better job? No question. If he’d recognised the tendency for politicians to lose fiscal resolve in difficult circumstances, he’d probably have been a little bolder in his original proposals. Most importantly, he’d have recast the public sector’s pensions plans. He’d have opted for DC rather than DB (defined contributions over defined benefits). In any event, he’d have raised the retirement age for public sector workers—to the same as that in the private sector or, better, to something significantly higher (70 versus 68).
Doing so would have returned the country’s fiscal affairs, almost at a stroke, to balance. And, a little later, inflation might also retreat. Why? Because the addition to the labour force would depress wage settlements (particularly in the public sector).
Additionally, the Chancellor might have made a public example of his senior civil servants. It would have been salutary to have announced, immediately on taking office, a 15% pay cut for Whitehall’s top Mandarins (lower grades taking proportionately smaller cuts).
And, in the case of the worst offenders—the Home Office, Treasury and MOD—(in recognition of their chronically poor performance), cuts of 25%, say. For the Bank of England (for a similar logic), 40%. For the FSA (a fortiori), closure without compensation. For most quangos, likewise (not a publicity stunt, but actual closure).
That would have got the message across. That would have rammed home the seriousness of the problem. There’d have been strikes, of course. But would they be noticed? In any event, better to have them early in the term than late.
Instead, in his 2011 budget, the Chancellor was far from bold. His decision to cut corporation tax was sensible enough. But he oughtn’t to have reduced the rate by a footling 1%. He should have opted for a scenario-changing 10%. If he’d wanted to stop companies relocating elsewhere (and to start them doing so here again), he’d have needed to make a perceptible difference.
His changes to the personal allowance and to the fuel duty were politically inspired. He hoped to ingratiate himself with the electorate. He’ll probably be disappointed by the results.
Instead, voters may be irritated at his continued featherbedding of commercial bankers. And they are almost bound to blame him and his (Blair-lookalike) PM for having to stump up the costs of a third war; each as pointless as the others.
It’s no surprise that securities markets have been dull in recent weeks. The economy is bad and getting worse! The politicians out-of-touch, and getting out-of-toucher. The issues are being played with, not addressed.