IT IS hardly unusual for a Chancellor to face a challenging balancing act, but George Osborne’s forthcoming spending review will prove a particularly tough call.
He reckons to be a fifth of the way to finding the £11.5 billion of cuts he is looking for, but if he is to ringfence health, education and pensions as he has indicated then other areas of the public sector will have to shoulder the remaining 80 per cent of savings – unless he raises taxes.
And this is where he seems to be heading. Seven departments have volunteered a 10 per cent cut in their budgets and Iain Duncan Smith is offering £3bn out of welfare spending to prevent deeper cuts at defence and the police.
But a number of departments are yet to agree, accounting for £8bn of the total saving he is seeking. This is exacerbating tensions between Whitehall and Number 11.
Crucially, this review applies only to one year, 2015-16. More and even bigger cuts are planned for the years ahead.
Unless some government departments are to shrink substantially, putting thousands out of work and reducing the range and quality of services provided, then sooner or later the burden will land on the private sector and individual taxpayers. Some economists are now predicting some sharp rises in taxation to allow the Treasury to meet its deficit reduction plans.
Against this backcloth, business lobby groups are urging the Chancellor to invest, particularly in capital projects to speed up the nascent recovery. There is some evidence of a pick up in activity, both in Scotland and across the UK and it would be timely for the Chancellor to give it an extra push.
What he must avoid are knee-jerk initiatives such as his help for homebuyers that bring about their own problems. In this case, there is concern that it will create another housing bubble.
He is also being urged to dismantle the ringfence around hitherto sacrosanct departments. The Organisation for Economic Cooperation and Development (OECD) is concerned about protecting some departments and sacrificing others, but it is also less enthusiastic about a programme of investment fuelled by more borrowing.
Today the British Chambers of Commerce calls for more investment in capital projects to help speed up the recovery by imposing measures that will stimulate growth. The problem, though, is that in a low-growth environment it may be a long time coming.
Raise online retail levy to help the high street
Retailers will be hoping that, after the coldest spring since 1979, some summer sunshine will encourage more of us to spend a day shopping. Reviving our high streets is demanding a lot of time and energy, and even plans introduced in some towns by Mary Portas, the television high street guru, appear to have come unstuck.
In the end, it may come down to taxes. Yes, shopping areas need good access, including easy and cheap car parking and public transport; they also need to be welcoming and to provide variety – issues covered in a recent report by the Centre for Retail Research.
But if the competition is mainly from online retailers then why not tax internet retailers higher than bricks and mortar shops?
A bill has just been passed to that effect by the US Senate. It’s worth considering here too.