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Plan A and other plans

I liked Plan A for the UK economy. I thought it would have worked. The Coalition government came together to get rid of the structural deficit over a 5 year period. They planned to do it mainly by cutting public spending. Extra borrowing, running at the whopping total of  an additional £155 billion in the last Labour year, would come down to a modest  additional £37 billion in 2014-15.

If, however, you looked at a bit more of the detail of the  Plan  as set out in the first Coalition budget of 2010 you saw that the first budget did not offer Plan A. It offered a Plan B. They did set out to bring the rate of growth in borrowing down sharply over the five years, from £155bn to £37 in the last year. However, they planned to do this mainly by a large  increase in tax revenue. They forecast a rise in total tax levied from £515 billion in the last Labour year, to a huge £700 billion in 2014-15. This big revenue surge allowed them to cut extra borrowing by £118 billion, and put up spending by £68 billion.  

In the both the 2011 and the 2012 budget they changed the plans again. Plans C and D both increased the deficits and borrowing planned for the 5 years of this Parliament. Spending duly went up as forecast, but revenues did not prove as buoyant as hoped. The Chancellor also felt the cuts in capital spending initiated under Labour went too far, and eased those a little in subsequent plans. Instead of borrowing an extra £451 billion over the life of this Parliament, the government now forecasts extra borrowing of over £550 billion for the five years. It has delayed eliminating the structural deficit for another two years.

This December the government will produce a late Autumn Statement, updating the figures yet again. It seems likely the Office of Budget responsibility, the independent official forecaster, will have to admit they have been too optimistic on growth and therefore on tax revenues yet again. We should be ready to see a forecast of yet more additional borrowing over the balance of the five years of this Parliament. Higher level income tax has fallen following the introduction of the higher rate. Capital Gain tax is estimated to be down this year, following the  increase in the tax rate there. The VAT increase has yielded more revenue. North Sea output and tax take has been disappointing following tax changes there.

Many people in the country seem to think the government has cut hard and deep, and has now got to the position where it is repaying debt. The reality is very different. Some government programmes, like defence, have felt the cuts. Many others, like overseas aid, the EU budgets, the benefits bill, the cost of pensions, health and education have seen increases in spending. As a result of this and the poor performance of revenues with the new higher rates, the deficit remains high. The country is getting deeper and deeper into debt.

 The Coalition was right to come together to stabilise the nation’s finances. They were right to make deficit reduction their number one aim. Deficit reduction is not a luxury when things are going better. It is not a barrier to growth. Excessive borrowing is a barrier to growth. The continuing run of very high deficits in this country for four years now have not brought economic growth. They have helped cause and been boosted by weak economic performance.

This autumn the government will put in place more features of its growth strategy. That will be welcome. Keeping the confidence of markets, reassuring people that debt will be brought under control, is also crucial to growth. If we all fear the next years will see us having to pay much more tax to repay all the large debts government is building up, that will not be good for confidence or for growth. The government does need to find ways to deliver more for less throughout the public sector. It needs to concentrate on priority areas and people for its public spending.

John Redwood

John Redwood

The Rt Hon John Redwood

  • Member of Parliament for Wokingham
  • Chairman of the Conservative Economic Affairs Committee

John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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