Belfast Telegraph

Thursday 21 August 2014

Budget 2010: The mountain we all have to climb just got steeper

Chancellor of the Exchequer George Osborne delivers his emergency budget in the House of Commons

Think of the next five years as a mountain that we as a country have to climb.

But for the moment we are still sauntering over the leafy meadows at the bottom, with the first nasty bit of the journey, the rise in VAT, more than six months away. The real grind, year after year, is still to come.

There were, in a sense, no surprises yesterday. We had been told what to expect and we got it: a plan to balance the budget over the next five years, with four-fifths of the burden on lower spending rather than higher taxes. That pace of consolidation is somewhat faster than that outlined by the previous government, but, given the huge uncertainties, not dramatically so.



The Government is correcting things about as fast as it reasonably could. To have clamped down faster would have risked derailing the recovery. Fortunately it is also about as fast as is needed to convince the global savers who have to finance the deficit that they might actually get their money back.



Between 2009 and 2016 the country will be increasing its national debt from £619bn to £1,316bn – the sort of increase that has never happened before in peacetime. A massive burden is being placed on our children. If you project forward, to get the debt back to the level of 1997 as a proportion of GDP will take until about 2030.



So how is it being done? If you step back from the detail, there are three big things happening. First and most obvious is the rise in VAT. It is a hard tax to avoid and is the third largest source of revenue after income tax and national insurance. So it will raise serious money.



The second big thing (and much less obvious) is the freezing of income tax bands, the higher rate bands right through this parliament. That will bring hundreds of thousands of people into the 40 per cent tax band. Indeed on my back-of-an-envelope tally, by the end of this parliament a man on average earnings in London and the South-east will be paying the top rate of 40 per cent. In showbiz terms the rich are shouldering the greatest burden. Individually that may be so but unfortunately there are not enough of them. The greatest part of the extra tax revenue is coming from the mass of working people a bit further down the scale.



And the third big thing? Well, that will be the spending cuts to come. We will get the detail in October; we only have the bald numbers now. But I find these numbers hard to believe. Is this Government, in the final year of its life (assuming it does last the full term) really going to carry on imposing the cuts, the last chunk of those 25 per cent reductions across most departments, when it is just about to face the electorate? I know the Labour plans translated into 20 per cent cuts on the non-protected departments, but 25 per cent? It is not going to happen, is it?



In any case, years two, three and four of this uphill trudge are going to be extraordinarily difficult. Year after year we as taxpayers are going to be ground down a little further as inflation bites into our real incomes. And in return we are, inevitably, going to be getting poorer public services. They may not be that much poorer, as after the spending binge of the previous government, there is surely plenty of fat to trim. In some cases there will be a sense of relief that the silly waste of recent years will be ended. But as many in the private sector who have experienced downsizing in their workplace will testify, it is very hard to cut spending well. Services deteriorate; good people get hurt.



At a macro-economic level we do have a new fiscal structure that is credible, and frankly that is a relief. The Office for Budget Responsibility has performed its initial task with skill. The new Budget process, with straightforward documents and none of "management speak" of the previous regime, represents a real advance. Alistair Darling's 2009 Budget, "Building Britain's Future" came in two sections totalling 260 pages, supported by a pile several inches thick of supplementary notices. George Osborne's effort, "Budget 2010" is 112 pages, with half an inch of other papers.



But this whole exercise is the work of a relatively small team of politicians and officials, a team playing with cohesion and confidence to be sure, but it is a top-down exercise-setting policy. The detailed grind of applying that policy, cutting public spending department by department, will involve many more people and accordingly be vastly harder. And it will go on and on. That is what worries me. What has to be done has to be done. This is not about politics, it is about mathematics. Even with this austerity plan we end up doubling the national debt.



We now have the map for the climb ahead. That climb has to be done but we have hardly begun and the more I look at the map the more daunting the journey appears.

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