Good ol’ Danny Alexander. Every Tory’s favourite Lib Dem minister has been speaking sense to his Cabinet colleagues. According to today’s Financial Times, he’s told them not to be free and easy with their chequebooks ahead of the next election. “Danny warned the Cabinet [that] the Treasury may have to rein in spending in departments this autumn.”
This warning comes at a particularly apposite time. Not only are there the concerns mentioned in the FT article, such as the sluggishness of other economies and of our own tax revenues. There’s also the recent exorbitance of the Tory leadership. The list of tax cuts that they’ve either committed to or hinted about seems to be growing by the week: the personal allowance, the threshold for the 40p rate, inheritance tax, and so on. And all while we still have a £100 billion deficit.
Some of these potential tax cuts (i.e. raising the personal allowance) are better than others (i.e. the IHT bribe for UKIP waverers and other likely voters). But the accumulation of them is what’s really damaging. These rat-a-tat pledges risk creating the impression that deficit reduction isn’t so important any more. And that only helps the party for which deficit reduction actually isn’t so important: Labour.
The Tory leadership would argue that it still puts a heavy emphasis on lowering the deficit – that’s why George Osborne spoke of £25 billion’s worth of extra spending cuts in his conference speech. But, increasingly, the spending cuts aren’t going towards reducing our borrowings. They’re being used to patch up the national accounts from the cost of other policy promises. Today provides another example of this: a further £1 billion of benefit cuts will then be spent on a further 3 million apprenticeships. Whether you agree with this policy or not, there’s no way it could be called deficit reduction. It’s simply moving spending from one spreadsheet column to another.
This problem isn’t just presentational. It could become chillingly financial. As I wrote in Bright Blue’s Modernisers’ Manifesto, Osborne and Cameron may come to rue the mathematics of their manifesto commitments, and particularly of their eagerness to cut taxes rather than raise them. I hope you don’t mind me quoting myself on that theme:
“Osborne aims to do away with the deficit, in its structural variety, by 2017-18. Ed Balls promises by the end of the next Parliament. The Lib Dems will probably go along with either, if it means being in another coalition. In any case, every party will have to talk deficit reduction in 2015.
But only the Conservatives, through their Chancellor, have hinted that they will reduce the deficit without further tax increases. This is a sentiment that will cheer many actual and potential Tory voters, but it could also be a mistaken one. For starters, I might have paid for some of the items on my wish-list by increasing property taxes on the wealthiest, including a revaluation of council tax bands. And I’d have done so whilst citing OECD research which suggests that, of all taxes, taxes on property are the least harmful to growth.
But more significant than my predilections is the uncertainty that clings to the public finances. Osborne’s preferred measure, the structural deficit, has always been an unknowable beast. It is, basically, the portion of the deficit that would remain even when the economy has fully recovered. But what is ‘fully recovered’? Or, to put it in econo-speak, what is the size of the ‘output gap’, the difference between current GDP and potential GDP? Various bodies, including the Office for Budget Responsibility, have various estimates for this number – but these vary wildly. The structural deficit could be smaller or larger than the Chancellor expects.
And that’s before we consider the possibility of another economic crisis brought on by, say, trouble in the Eurozone. What would Osborne do then? He could cut spending even further. But there’s a problem with that: those cuts often take years to filter through to Whitehall’s balance sheets. He could even cut taxes on the grounds that doing so reduces borrowing by stimulating growth. But there’s another problem: the ‘dynamic scoring’ underlying that assumption is a terribly imprecise science. Tax hikes, as unwelcome as they are, are sometimes a convenient and necessary policy. Ruling them out is giving hostage to our nation’s fortunes.
Osborne’s original expectation was, we know, to have the deficit cleared this year or next. Now, that happy date has been pushed back three years. His Plan A may have been the right plan, but it shouldn’t be forgotten that Plan A also went awry. That’s probably the abiding lesson of this Parliament. If you want to reduce the deficit, then err of the side of pessimism and scepticism. No-one knows anything, including armchair Chancellors such as myself.”
Eradicating the deficit was the Great Promise made at the beginning of this Parliament. It will, thanks to the vicissitudes of our economy, be the Great Promise made at the beginning of the next. The Tories should be wary of complicating this with other promises. There may be electoral gain in pledging tax cuts, but surely there’s also some in marketing yourself as a serious party.