By 2015, the austerity programme instituted by the Coalition government (and reluctantly accepted in part by the Labour Party) will have been rolling on for five years. As vast sums are slashed off departmental budgets, it is becoming increasingly difficult to find politically acceptable cuts to make. Indeed, as George Osborne plans a three year round of cuts post-2015, ministers have agreed a mere £1.1 billion in cuts- a fraction of the level that Osborne’s targets require. And the question is raised: ‘what if Britain reaches a point where no more cuts can be made?’
At present, the budget deficit stands at £120 billion. Despite the draconian spending cuts inflicted, particularly on local government services, we continue to borrow at four-fifths of the rate that we did in 2010. This is due to the effect premature fiscal contraction has had in slowing- or rather, eliminating- economic growth. Unfortunately, it is fully possible that the next government will inherit a deficit of £100 billion due to Osborne’s determination to pursue his failed monetarist economic policy. It is here that our political leaders are presented with three unpalatable courses of action, with each one shaping the country for decades to come.
Firstly, there is the option to continue ‘Plan A’. Allowing for lost output as a result of the spending cuts, this would mean a reduction in the size of the state of about one-quarter. ‘Ring fencing’ around the NHS and education benefits would not be sustainable, and in fact the very existence of the NHS would be in doubt. Poverty and unemployment levels would continue to rise, and the country would stagnate economically and socially.
Secondly, use of the tried and tested Keynesian fiscal stimulus could be used. The issue here lies in the fact that, as the Coalition will have virtually doubled the National Debt, the risk is that there’d be limited room for maneuver on borrowing. Like France, Britain would have the problem that it wants to borrow to invest, but can only raise limited funds to do this. Stimulus that is too limited in scope will fail- unless it is cleverly targeted.
Alternatively, a policy of raising tax rates could be initiated. After all, taxation around the world has been at artificially low levels over the past decade (by post-war standards). For example, the basic rate of Income Tax when Margaret Thatcher left office was 27%. Today, it is just 20%. No doubt this option is politically toxic, but if the choice became as fundamental as one between charging for NHS treatment or paying more National Insurance, the latter seems a lot more palatable.
However, raising tax is just as effective at reducing consumer demand, the bedrock upon which productivity is built, as cutting spending. That is, unless tax rises are introduced gradually and focussed where it will not impact the general public. In other words, we are talking about people and organisation which have large amounts of money but are unlikely to spend it.
So what would an economic policy that respects a cuts-ceiling look like? It would feature a stimulus package together with tax rises imposed on the well-off, who are likely to invest a high proportion of their incomes rather than spend it. We’d see a large public works programme, with vast new housing, renewable energy and transport developments. We’d see public sector savings that are made in physical resources, not labor. And yes, we’d see higher personal taxation once the economy is growing.
We’re in for a lot of pain, whichever course we take.
