New Chancellor of the Exchequer, George Osborne, presented his Emergency Budget to the House of Commons yesterday. He described it as tough but fair, with nothing hidden. His subjective assessment might not correspond with the objective impact of the public service cuts and tax increases inflicted across the board. The movers and shakers in the City might breathe a sigh of relief that it was not worse, while the most vulnerable will feel that they are victims of circumstances beyond their control. The people of Ireland might also look on, with envy, wishing that their three budgets of last year had been no worse. Therefore, any judgement of the Emergency Budget is relative.
Last Thursday, David Cameron was in Brussels resisting the EU bid to control the UK’s economy. The Prime Minister rejected attempts by the European Commission to pre-vet Member State’s budgets by insisting that any UK budget must be first presented to Parliament for approval. It was therefore disappointing to witness the new Coalition Government acting the same way as the last Labour Government. Over the weekend there was a stream of leaks from Government sources revealing the contents of the Budget and George Osborne made himself available to the Sunday political shows on television to answer questions about the forthcoming Emergency Budget. It came as no surprise to find the budget measures that had been trailed were completely accurate. If the convention, that all announcements must be first made to the people’s representatives in the House of Commons, is to be upheld it is incumbent on the House and the Speaker to hold the Government to account. It seems that they are incapable of doing that and the sooner that there is a separation of the Executive from the Legislature, the better it will be for the people.
In the seven weeks following the General Election, we have resisted the temptation to criticise the new administration or speculate on what they might or might not do until we had the facts. Even with the agreed programme for government and the subsequent Queen’s speech it was not entirely clear what lay in store. With the Budget now out in the open and the knowledge that the public spending cuts of 25% will be detailed in the Autumn, it is possible to make constructive comments based on facts. The first would be, why was this Budget described as an Emergency? Only the introduction of the higher capital gains tax was immediate, with the increase in VAT to take effect next January.
The main purpose appears to be an assurance for the markets – especially the gilt bond traders – and the credit rating agencies that the UK finances are to be put on a sound footing. In that respect it appears to have succeeded, but it is still not clear that the best interests of the UK are being served. Osborne is adopting the Canadian precedent from the 1990s of 80% spending cuts and 20% tax increases, but this only worked because it enabled an export led recovery on the back of a buoyant US economy. Our EU neighbours, especially in the Eurozone, are in similar economic circumstances to the UK and the devalued Pound Sterling has not resulted in an increase of exports. We can argue about the tactics, and content and mix of cuts and taxes, but the main concern should be the strategy and time scale for recovery and debt elimination.
The reason why we were not able to respond effectively to the financial crisis that started in the US was because we had no reserves and our debt had increased. The housing bubble was not controlled and public spending had been allowed to exceed the prudent level of 35% of GDP. It is therefore important that public spending and debt are brought under control as soon as possible and before the next general election, which might go the full term to 2015. The projections in the Budget are not good. Government expenditure as a percentage of GDP will drop, but will still be in excess of 40% in 2015. Government gross debt will continue to increase up to 90% of GDP by 2015, with net debt peaking at 75% in 2014. A balanced budget, with no borrowing requirement, will not be achieved within this Parliament; it will be 2016 at the earliest when the accumulated national debt will then be £1.3trillion. There is no stated plan for eliminating the national debt. Neither are there any plans for credit controls to ensure the reduction of commercial or personal private debt.
Not only must all debt be eliminated, there is also a need to create a sovereign wealth fund. Our North Sea oil and gas revenues have been frittered away; but what remains to accrue to the nation should be earmarked for the UK Wealth Fund. If we can achieve those objectives, we can free ourselves from the markets, banks and other financial institutions. It will also mean that we will survive the next global economic and financial disaster that is inevitable without reform of the current multi-national institutions. There are no signs that anything will change so we should plan for the worst case scenario.
It is in that context that we question whether enough is being done. Tough as these budget measures are, in retrospect they may be judged to have taken too long to ensure our survival in the future. The clock is ticking and we seem sure to run out of time. If we do not eliminate debt by 2018 and then start to store up resources, we will have failed. Perhaps we have failed already and it is beyond the capability of any government to tackle the magnitude of the problem; ten years too late.