Opinion: so you want to be Chancellor?

This thread is for you to say what you think should be done about the deficit.

  1. How much do we need to cut the deficit by?
  2. When should we start cutting?
  3. Over how many years should we cut it?

Let’s leave the detail of what taxes to raise, what services to cut, and what the ratio should be between tax rises and spending cuts. There are other threads to discuss those issues.

Let’s also leave the partisan politics to one side. These are difficult questions, no one really knows the right answer. And the answers aren’t necessarily leftwing or rightwing. So let’s be generous in our responses to each other.

The Office for Budget Responsibility estimate the 2009/10 deficit to be £156bn, but most commentators aren’t worried about the temporary part of the deficit that is due to the recession. The big worry is the structural deficit, the £86bn or 6% of GDP deficit that will, according to the OBR, persist even when the economy has recovered.

There is some controversy over the structural deficit. The figure of £86bn is only an estimate, as the Treasury acknowledge. But, if we’re to plan for long-term stability in the nation’s finances, it’s useful to have some idea of the long-term deficit we are faced with, even if it’s only an approximation.

All three parties have talked about eliminating the structural deficit, in the previous Labour government’s case by 2017, in the current coalition’s by 2015. The IFS have described these plans in their budget briefings.

There’s been a lot of heated debate on this site about when to start cutting. I think the disagreement has been over-hyped. The coalition have introduced £5.7bn cuts in spending for this year, but if you look at the chart on page six of the IFS briefing, these are only a fraction of the measures planned for following years.

So the second question, of whether to delay these cuts, may not make much difference to the deficit reduction programme, or to the pace of economic recovery.

The third question, over what time frame we should act to reduce the deficit, is the big one.

If we ignore the smaller measures for this year, the big difference between the Darling and Osborne plans is whether the measures should be concentrated over four years, from 2011 to 2015, or over six years, from 2011 to 2017. By spreading the pain over six years, Darling could plan cuts and tax rises of around 1% of GDP each year. By mostly concentrating over four years, Osborne increased the pain to 1.5% of GDP a year.

To put it simplistically, the difference between the Osborne and the Darling plans is, to get the pain out of the way by 2015, or spread the pain till 2017.

There are arguments in favour of either approach.

  • If we spread the pain, then we reduce the pain to the economy while it is still fragile from the recent recession. If we don’t spread it, some fear this could cause a double-dip recession.
  • If we allow more time to make cuts, we can soften their impact. It allows more time to shed staff through voluntary redundancies. More time to identify areas of inefficiency. Less of a shock to the general public, with some services steadily downgraded, rather than suddenly cut.
  • The pace of the Darling plan may be more realistic. It may be politically impossible to make the kind of sudden cuts that the Osborne plan envisages.

But there are downsides to slowing the process.

  • In the three decades from 1970 we had three recessions, about once every ten years. If this cycle were repeated, we should expect a further economic downturn from around 2017. If this happens while we still have a structural deficit, and a nation debt approaching 80%, the government may not be able to raise the finances to fund a stimulus to mitigate the effects of that recession.
  • Immediately after an election is the easiest time to take tough decisions. If the government delays, it may find the political situation in the run-up to the 2015 election makes it impossible to act.
  • The UK credit rating has already been downgraded in China. If other agencies believe the UK may use inflation to downgrade its debt, or think there is the remotest chance that a future government could default, then we will lost our AAA rating. If we were downgraded to AA+, it is estimated that it would cost an extra £5bn a year in debt interest payments. Further downgrading would be even more expensive. And ratings agencies have specifically warned that the Darling plan is not enough.
  • Every year we delay cutting the deficit is another year we are adding to the debt. If delay adds 6.5% of GDP to our debt by 2015, that will add to future interest repayments.

So, that’s enough from me, now over to you.

(I’ve tried to be balanced in my analysis, but the need for brevity has forced me to be simplistic. I’d welcome any critiques, especially if they include links to articles specifically relevant to the UK situation)

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This entry was posted in Op-eds.


  • One thing I would like to see is councils that started cutting last year being rewarded rather than being expected to make the same level cuts as those that didn’t bother cutting early.

  • Paul McKeown 3rd Sep '10 - 1:10pm

    Very incisive article, George, thank you very much indeed.

    If we were downgraded to AA+, it is estimated that it would cost an extra £5bn a year in debt interest payments. Further downgrading would be even more expensive. And ratings agencies have specifically warned that the Darling plan is not enough.

    Nothing more need be said. Just repeat until sunk in.

  • It depends on whether you have swallowed the entire supply side economic arguement as your party leadership has seemed to do ever since joining the Tories (I voted Lib Dem, I am not a party member, hence “your”)

    I run a small business, cutting my corporation tax will have absolutely no impact on my ability or desire to hire staff. What the economy is lacking is demand, not supply.

    Massive cuts in public spending, coupled with massive contractions in credit and an unstable private business environment mean that I have absolutely no interest in investing in the future of my company.

    The supply of capacity within the economy is not the issue, demand is the issue and austerity is the enemy of demand.

    A one sided question of “what should we cut” ignores the fundamental debate of how should we grow the economy.

  • The deficit needs to go and should go soon. Ideally, we’d be stimulating the economy with money saved during the fat times, but that isn’t possible right now. But we should start with genuine efficiency savings. You can’t save billions by cutting back on pot plants and dialling the thermostat down by a degree. But the NHS spends millions on management consultants that are an enormous waste of time and money, money that could be better spent on improving the well being of its staff and so reducing the very high cost of their sick days. Benefits like winter fuel allowance should be means tested and better targeted at those who genuinely need it. Defence spending could be moved away from companies in this country who have consistently over promised, over charged and under delivered. The jobs lost might be easier to make up than you might think, as an article in a Birmingham newspaper a few days ago claims that local manufacturers are facing a skills shortage of 90000 employees over the next 5 years. Cuts like these need to be identified and made asap. When cuts have been made via genuine efficiency and streamlining, then we should re-assess and see where further pain will be needed, but it’s irresponsible to make cuts until all genuine waste has been excised.

  • @ George Kendall: I’m pretty positive that cuts to front line services are necessary too, and very soon. My thinking runs thusly: by initially focusing on making efficiencies, it helps to maintain morale and encourage departments and staff to really work hard and try and find those efficiencies to try and mitigate against future cuts. It also avoids the temptation to simply shed staff in the front line as a pr stunt to rally people against the cuts generally, a common reaction. But frankly, efficiencies and good practices shouldn’t have to wait until crises to be put in place and these should have been worked on for years. As you said, political factors constantly play their part, as no one really wants to be seen advocating cuts when times are good.

  • Anthony Binder 5th Sep '10 - 5:13am

    We need to balance the budget, not focus on cut the deficit.

    Implement a Land Value Tax, and then, take the budget from the Lib Dem´s manifesto, anyone remember that publication from back in the spring?
    There´s a balanced budget in that one.

    Why not support that one, wouldn´t that be quite OK if Lib Dem´s supported a Lib Dem budget?

  • Anthony Binder 8th Sep '10 - 9:48am

    No a balanced budget is a budget that has a balance between revenue and expenses, revenues can be raised through taxes and through issuing of government bonds, that is especially useful for long term investments such as infrastructure, housing, green energy developments. The bond financing of the economy is not only unavoidable in macroeconomics, it is inevitable if a country wants to develop, grow, increase wealth, increase fairness etc. All the structural change that a Lib dem policy and economic was talking about in the manifesto and during the process of develop the paty policies over the years rely on investments that has to be financed through bonds. This financing is what the debate nowadays label public debt. Remember that Thomas paine stated that a country without public debt wasn´t looking after it´s citizens.

    So public debt is not a bad thing, it is a necessity and should therefore be included as a way of financing the country´s expenses.

    Implementing a Land Value Tax of about 2% in the UK would create a revenue to the state of about £70bln over this parliamentary period or around 10-15 bln annually aswell.

    Scrap the Trident on top of that and you have a revenue surplus, and the discussion should be about what to do with the surplus. I for one would argue for infrastructural investments, more schools, smaller classes, development of green energy to start with. I would strongly argue against cutting the public debts, or the government´s own bond with i´s citizens to paraphrase Thomas Paine.

    We can also include a mansion tax.

    I see this debate as a threat against the party´s identity. The core of the Lib Dem´s is all of a sudden under discussion since we accept as a matter of fact that public debt is a bad thing and therefore any revenues from bond issuing is a deficit, since we only acknowledge tax revenue and therefore we must scrap and abolish the key policies that made the party unique, and walk the line where the other two have walked for years.

    The UK rating downgrade by Dagong is, as I am sure you are fully aware of, only a political and ideological expression and has nothing to do with reality.

    A balanced budget has revenues streaming in from taxes, customs, bond issuing and national levies and fees, and expenses that match that revenues.

    We are close to a congress that has excluded discussions about a fee/levy on the banks issuing of new money, something that could generate more than £500mln if the levy was connected to the BoE rate. We have a congress that won´t take up the issue of Land Value Tax. And I am afraid we will have a congress that decide that we no longer should oppose the nuclear power/weapons.

    Tragic, I hope I am wrong, cause I can´t see any Lib Dem´s if that is the outcome of the congress

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