Passing the budget buck is shameless politicking

Published on Thursday 19 November 2009 21:55

IN RECENT months, an uneasy sense has grown of a country trapped in two parallel worlds. There is the world that worries over jobs, household budgets, growing debt, meagre savings and longer term security. And then there is that parallel world, the official world of government, confident in its spending, unfettered by cost and comfortable about spending ever more amounts in pursuit of its aims.

This week the space between these two parallel worlds widened alarmingly. The world of the Queen's Speech set out bills to make the abolition of child poverty a law, to extend personal care to England, and, as if to nullify these extra spending commitments, to make the halving of the budget deficit within four years a legal requirement.

Barely had the ink dried on all this aspirational legislation than news came from that other world, the one that you and I live in. We are told that the budget deficit hit 11.4 billion last month, far higher than forecast and the highest deficit ever recorded for the month of October.

This takes the government's borrowing requirement so far this year to a record 86.9bn, up from 33.6bn at the same stage last year. At the current rate of growth the government's budget deficit is set to hit 200bn rather than the 175bn previously forecast, adding to a debt pile that already stands at 825bn.

It is scarcely credible that these two parallel worlds have not already smashed into each other. But one prediction can be made with confidence. These worlds are about to collide, and with the most severe consequences.

Everyone knows the government is out of money. Everyone knows the Fiscal Responsibility Bill will not cut the borrowing pile by a single penny. It is time-delayed in its introduction and carries no sanction or penalty for its breach. Few believe a word of it, because it is promoted by a government that long proclaimed "golden rules" on fiscal stability but which failed to hit budget deficit forecasts in no less than six out of the past eight years.

It has been a parliamentary tradition that no government should bind its successor. But this is what much of the Queen's Speech legislation sets out to do. It forces the next government to be chaste, not this one. It is politicking of the most shameless sort. And it is playing with fire on two counts. By passing questionable laws to impose policies on a future government, it risks bringing parliament and the law into disrepute. And by delaying real action to tackle the billowing budget deficit, it risks spinning the economy into a second recession.

The government hopes that, in the few months left to it, a modicum of economic growth will return, sufficient both to curb the growth in its debt and to raise its standing in the opinion polls.

Let's first deal with growth. There is little doubt we will see genuine growth this quarter – the last of the G7 economies to move out of recession. However, few believe that this will automatically lead to a strong recovery.

The standard rate of VAT is due to return to 17.5 per cent in January. The Stamp Duty holiday on properties priced less than 175,000 will vanish by the year-end. And a new 50 per cent tax band takes effect from April.

But these tax increases are just the tip of the iceberg if the budget deficit is to be brought down.

The eventual degree of fiscal tightening over the next few years to stabilise the public finances will require reductions in borrowing of about 70-80bn.

What might this mean in the real world? Four percentage points on the basic income tax rate, from 20 to 24 per cent, could raise 20bn. An increase in the standard rate of VAT from 17.5 to 20 per cent could yield almost 12bn. But these together bring in "only" 32bn. This means yet more tax increases will be needed, or swingeing reductions in public spending. Either way, household budgets will be hit, depressing consumer demand and domestic consumption. This accounts for some two thirds of the UK economy.

In the political realm, the crude calculus is that an imminent if short-lived move out of recession will lift Labour's standing in the polls from the current 28 per cent to 32 per cent by the spring and to 35 per cent by the early summer. Such an outcome would make a hung parliament a real possibility.

However, a hung parliament would be seen by financial markets as the worst possible outcome. With the prospect of months of political horse-trading and no evident agreed path for reducing government borrowing, the UK's credit rating would be under severe question. Markets would very quickly sell out of sterling and the government debt market, forcing up interest rates.

Against this background, it is remarkable that some in Scotland believe that legislating on Calman is the "big issue", as if this was some sort of stepping stone to an escape route out of this greater crisis. But there is no hiding place. Faced with the greatest peacetime debt in our history, the cry for "borrowing powers" is unlikely to persuade as a solution.

To put the issue in some focus, Scotland's share of UK debt and borrowing is around 9 per cent. That is, on any separation, Scotland would be liable for 9 per cent of the UK's fiscal liabilities. Thus our share of a UK debt pile heading towards 1,400bn would be 126bn, or more than three times the size of the Scottish budget. There are a few thoughtful MSPs who have grasped the magnitude of the problem, but sadly not many.

Scotland cannot shrink from, or fantasise its way out of, spending cuts that must inevitably come after a decade of sustained spending increase. We are at the end of the road, out of options, deep in hock and with a cynical Queen's Speech exposed for the fantasy it is. Two parallel worlds are about to find out which one's for real.