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The Chancellor and his shadows

The Channel 4 debate between the three men who want to be Chancellor after the General Election contained no fireworks.  However, it did give us a sense of how the debate on the economy might pan out during the campaign.

The opening remarks in a debate can be revealing. We saw in George Osborne's statements in the first few minutes a Tory line on tax which David Cameron used in his response to the budget statement. That is that a Labour government means more taxation, with a suggestion this would risk the recovery. Until today, the Conservative alternative was to somehow cut spending faster and deeper than the bold plans already outlined by Alistair Darling in the budget (and in December's pre-budget report). Ahead of the televised head to head, George Osborne declared that a Conservative government would partially reverse plans to raise National Insurance contributions from April 2011. This would be paid for by further spending cuts and the Conservatives say they would cut an additional £6 billion more than Labour plans. As the Institute for Fiscal Studies comments, "By cutting spending next year and delivering the tax cut a year later the Conservative proposal would take additional spending power out of the economy for a year at a time at which the recovery is likely to be at its most fragile."

Furthermore, the Tories say they would cut the deficit faster, beginning this year. If what cuts they have identified (and there is little detail) are in effect mostly being spent on a tax cut, this means even more spending cuts are required. It is easy to forget that Labour will already be cutting discretionary government spending from April as the extra fiscal stimulus of the past year is unwound. Non-discretionary spending (welfare payments) is expected to rise as a result of the recession, but lower than expected unemployment and perhaps higher than expected growth might ease this. To cut even further than planned would be irresponsible.

The Tory claim that National Insurance increases in 2011 will affect jobs must be set against their aim to make harsh cuts this year. That would affect frontline services and increase public sector unemployment at a time when the private sector is only just getting up from the floor. Nevertheless, this line on tax from the Conservatives needs to be watched and its weaknesses exposed each time it is repeated.

There was a relatively high degree of consensus in the debate about how enormous is the task of managing the recovery and putting the public finances in a better shape. We heard a Conservative party shadow chancellor tell us that it was the job of government to deliver a fairer society. The problem is that the rhetoric has no support in Conservative policy.

Labour's message on creating jobs and on protecting the recovery came across clearly. Alistair Darling's appeal to his judgement carried weight. The chancellor has done a good job of maintaining confidence in management of the public finances without bringing recovery to a halt.

A member of the audience asked about the ‘travesty' of banks returning to their old ways after a massive taxpayer bailout. Darling was able to point to the bonus tax, the requirement for bonuses to be deferred and paid in shares, and even the 50p tax rate. He highlighted measures to boost bank lending. The other two had little to add to this and Osborne in particular said nothing specific on bonuses. However, banking does need structural reform or we will have another financial crisis. There is still much anger towards the banks and Labour's manifesto must tackle this head on and in clear terms.

So much for the substance, what about the style? This debate should have been a golden opportunity for a Conservative opposition spokesperson. Osborne may be relieved that he didn't obviously slip up but neither did he grasp the debate and display the gravitas we need in a chancellor. Vince Cable was clearly progressive and clearly independent. He exposed some of the contradictions in Conservative policy and was impressive against Osborne, but sometimes appeared a spectator. Alistair Darling acquitted himself well, displaying the confident grasp of economic policy the country expects of its chancellor, especially during these difficult times.

This article was first published on the Progress website on 30 March 2010.

Progress, 30 March 2010, 30/03/2010

Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
The IMF's Fiscal Monitor is actually quite radical.
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Responding to Brian Griffiths' article in The Article on the risks of inflation.