Progressive moments in the age of austerity.
IF THE Chancellor of the Exchequer had even so much as hinted that he saw green shoots of recovery in last week’s Budget, the criticism would have been immense. Such was the backdrop to the statement he gave. There were few surprises. Yet the official announcement that borrowing is expected to rise to levels beyond what was conceivable just a year ago has still come as a shock. This was not a Budget without a theme. It was just a bleak theme about public finances deteriorating sharply following the financial crisis. As a result, Labour must review its political agenda fast.
Alistair Darling revised down his estimates of gross domestic product growth this year to be more closely aligned with other forecasts, with national income falling by 3.5 per cent. He expects a recovery to begin into 2010, with growth of 1 per cent next year and 3.5 per cent in 2011. It was unfortunate that the International Monetary Fund released its new forecasts on the same day. The IMF expects the British economy to contract by 4.1 per cent in 2009 and continue to shrink in 2010. Moreover, two days later, the first estimates for GDP in the first quarter of this year were released, indicating that GDP fell 1.9 by per cent, or 4.1 per cent year-on-year. Revised estimates will be released later.
The sharp slowdown has impacted on public finances. Net borrowing this tax year is now forecast to be £175 billion – up from £118 billion forecast in the November Pre-Budget Report. This will be around 12 per cent of GDP, as the Institute for Fiscal Studies has highlighted. As the economy slows, so tax revenues fall, but government spending on benefits rises. These effects are known as the automatic stabilisers. If the economy does not pick up as the Chancellor expects, tax revenues may be even lower than predicted.
The worrying aspect of the debt position is that the Treasury believes the structural deficit (debt that will not just decline as growth picks up) will form 9.8 per cent of GDP in 2010-11. This is partly due to a decline in the economy’s productive potential. The Treasury does not expect it will again see some of the tax revenues it received over the past few years. The scale of the borrowing is such that £220 billion will have to be raised this year by the sale of Government bonds. Suddenly, politicians are examining bond yields and trying to gauge the market’s reaction.
There is a fiscal stimulus as a result of the Pre-Budget Report and the latest Budget, for example through adjustments to tax credits and VAT. Darling also wisely ignored calls to cut spending now, at a time of deep recession when the economy will rely on the Government. Indeed, he boosted spending on unemployment and business support, such as via the new Strategic Investment Fund. However, the Chancellor signalled that spending growth would drop to 0.7 per cent in real terms between 2011/12 and 2013/14. That means cuts. The IFS estimates that if cuts were distributed evenly across Government departments, only International Development would see real spending growth. In practice, Labour will want to protect health and education. The IFS calculates that cuts yet to be announced could amount to £45 billion.
Darling also announced tax increases. We knew already that National Insurance contributions are set to rise by 0.5p in 2011. The Chancellor changed plans for a 45 per cent tax rate for incomes over £150,000 per year in 2011 by raising the rate to 50 per cent and bringing implementation forward to next year. Higher rate pension tax relief is to be tapered down to 20 per cent for incomes of £150,000 and over. Various duties were also raised.
The language of politics includes phrases such as “making tough decisions” and “hard choices”. They will be much more than phrases soon. So we need to focus now on what spending plans really matter. The Conservatives will face these hard choices, too, as we approach the next general election. Their priorities will be different.
The financial crisis may well have created a “progressive moment” for Labour, but being progressive does not mean being more relaxed about higher levels of debt unless it is essential. It will be about finding the right relationship between the markets and society. There will be little new money to help solve our social problems. Instead we will have to focus on changing the incentives in our economy and encouraging an increase in the productive potential of UK plc.
While the reaction to the Budget was almost universally pessimistic, it is possible to be too pessimistic. Simply because the IMF’s growth forecasts are below the Treasury’s does not mean the IMF is going to be right. Economic forecasting is notoriously inaccurate. In the current atmosphere, we embrace each item of negative news. That is not to discount the serious economic conditions. Yet we risk too easily forgetting that we remain much better off than ten years ago. The investment in public services has improved the lives of many, with new hospitals, new schools and shorter waiting times for operations, to give just three examples.
The Chancellor was right to give a sober account of the public finances. Labour must now focus on developing and communicating a bold progressive vision for everyone that is suited to these times.
This article was first published in Tribune on 1 May 2009.