John Baron is the Member of Parliament for
Basildon and Billericay. Before entering politics, John worked in
the City advising mostly charities on their investments. He presently writes a
column for the FT’s Investors’
With the dust now settling on the
Budget, it is clear the Chancellor has chosen to stick with his economic plan.
Whilst a number of individual measures were welcome, the Coalition has simply tinkered
by moving a few £billion around in an economy of £1.5trillion. This will have
the same effect as moving deckchairs around on the Titanic – or the band
changing the music – and will prove woefully inadequate. What is needed is a
substantial cut in spending, allied to substantial tax breaks to get the
It is perhaps worth reflecting on
yet another set of missed targets. The original plan was that we would have
eliminated the annual deficit by 2015, and even begun to reduce the national
debt. But we will still be adding to the debt pile in 2017/18. The Government
boasts of reducing the deficit by a third – this still means we are adding to
the debt, but at one-third less the rate previously.
A common refrain used against
Labour when we first came to office was that they had doubled the national debt
in their 13 years of power. According to figures from the Taxpayers’ Alliance,
the present trajectory suggests that by 2017/18 the Coalition Government will
have more than doubled again the official national debt it inherited in 2010. And
this assumes the OBR’s optimistic growth forecasts remain intact – something
that has yet to be achieved.
Such proliferate borrowing will
test the will of the markets. But it will also act as a brake on growth, which
in turn adds further pressure on the numbers. Growth for 2013 and 2014 is now
expected to reach 0.6% and 1.8%. As recently as December, these forecasts were
1.2% and 2.0%. No wonder the message to the Bank of England is to “see-through”
the inflation targets in order to encourage growth.
To a certain extent, one can
sympathise with Treasury policymakers. This slowdown in the West is unusual: it
is a deleveraging recession and not a destocking one. Traditionally, a good
dose of Keynesian stimulus – using borrowed money if necessary – would have
corrected the situation. This option is not available today. The hallmark of
this recession is excessive debt – both governments and consumers have lived
beyond their means. The cupboard is now bare, and the markets know it.
The Government has essentially
three options open to it: default, growth or “financial repression”. Default is
the least attractive. Given the extent of debt in the system, this would usher
The second option, and the best
long term solution, is economic growth. But the government refuses to grasp the
nettle. It would require substantial spending cuts. The Taxpayers’ Alliance
calculates that by 2017/18 over 30% of all government revenues will be
earmarked to service past liabilities rather than pay for current services.
This is economic madness.
Meanwhile, government spending
priorities compound the error. By essentially ring-fencing Welfare and the NHS,
and increasing spending on International Aid, around half of total government
expenditure is protected. This amplifies the strain on remaining departments.
For example, our Armed Forces are being cut to the bone and beyond, at a time
when many countries not necessarily friendly to the West are increasing their
Yet the government fiddles, and
rearranges the deckchairs. In the 1990s, Canada cut spending by £7 for every £1
raised in tax. Éire has done well to reduce its spending by 19% since the
crisis. Other countries have done likewise. But the UK refuses to cut spending –
thereby adding to the debt pile. The ship of state stands more chance of
staying afloat in choppy waters if the weight of Government spending is
reduced. There is money to be saved, but political will is required.
As a Nation, we need to
rediscover our work ethic. For example, why should anyone on Jobseeker’s Allowance
receive benefit when they have refused a suitable local job? Having visited
various European capitals recently with the Foreign Affairs Committee, I was
struck by the total lack of “foreign” workers in the restaurants, hotels,
conference centres, etc. How this contrasts with over here. Despite my humble
upbringing, a work ethic was instilled from early on. I applied myself and was
lucky. Millions have done likewise. But there are also millions who have not.
This needs to change. Today, the
third, fourth and fifth quintiles of the population are receiving more in
benefits than they pay in taxes. According to the Centre for Policy Studies,
40% of non-retired households in 2011/12 were in this position. The figure was
just 29% in 2000. This course is unsustainable. Labour damaged the economy, but
this government is doing too little to put it right.
Real cuts in spending would give
us more headroom to introduce substantial tax cuts to encourage growth, drive
down unemployment and raise living standards for everyone. At present we are
only tinkering. The 1% cut to corporation tax, welcome though it is, simply
means we now have the 17th lowest rate in the world according to the Saїd
Business School. Take into account reliefs and allowances, and Britain ranks 22nd
out of 33 countries.
Large numbers of businesses have relocated
to lower tax regimes including Éire. No management worth its salt is going to
go to the upheaval of relocating their business to take advantage of the 17th
lowest tax rate in the world. Deep tax cuts across a spectrum of areas to
encourage business, especially small businesses, is what is required to help increase
competitiveness and spur growth.
Other supply-side measures are
needed, together with real cuts to regulation courtesy of the EU. But corporate
tax cuts there must be. History is awash with examples of better economic
growth and greater prosperity for all if such measures were implemented. But
all we have is the orchestra playing on – with occasional changes to the sheet
music – as the Titanic continues towards its rendezvous with the iceberg.
The Government’s plan is to steer
towards the third option – that of “financial repression”. The objective is to
create a little more inflation in order to eat away at the debt over time – a
policy pursued after WW2 on both sides of the Atlantic. This is perceived as
being the least painful and therefore the most politically astute. It is being
achieved by keeping interest rates artificially low at both ends of the yield
This is easy at the short end
because central bankers are paid by government. It is achievable at the longer
end by forcing the big players, the pension funds and banks, to be buyers of
government bonds through regulations such as asset/liability matching and
capital adequacy ratios – and yields reflect this artificial demand.
This is a dark art. Quantitative Easing
is an essential ingredient. This will also help to drive down the Pound. It is
all part of the script. Whether successful or not, interest rates will remain
low for years – there is too much debt in the system, and default is to be
avoided. Meanwhile, savers will be crucified – the view being they can afford
it because they are the only ones with money.
This all bodes ill for the
longer-term health of the economy and country – stock market investors and
property speculators being some of the few beneficiaries in the short term.
Successive Labour governments have simply not grasped that economic mishap is
the consequence of ever greater spend and role by government. It is no
coincidence that most Labour governments have ended in economic failure.
Chancellor Balls would do no better – and probably worse – having influenced
the last shambles.
The Government is right to say
you cannot borrow your way out of debt. But it is wrong in refusing to face up
to facts and cut spending. Instead, it has opted for austerity by a thousand
cuts and inflation – the easier option. History suggests this is unwise –
attractive though it may seem in the short term. Inflation, and its
expectation, leads to loss of competitiveness, falling living standards and
economic strife. The 1960s and 70s should have taught us that.
Instead, we need conviction
politics and conviction economics. The Conservative Party will – somewhat
unfairly – never be perceived as the nice party or the caring party. We get
elected because we deliver economically – respect, not affection, being our
passport. Policymakers had better wake up to this fact, otherwise this ship is going
down by the stern.