Osborne’s economic gamble
Amid all the discussion of ‘severe cuts’, perhaps the most important fact to come out of today’s Comprehensive Spending Review is that total government spending in real terms will only be reduced by about 3% by 2014/15. According to the projections, this will reduce the share of GDP accounted for by public spending to roughly the same proportion as in 2006/07. Accordingly, the CSR is hardly a serious attempt to roll back the state.
The absence of significant overall cuts also implies that economic growth and the resulting increases in tax revenue are the main planks of George Osborne’s deficit reduction plan. Yet, as Tim Congdon reminded us recently, there are several reasons to be pessimistic about the medium-term growth prospects of the UK economy. For example, all of the following will inhibit output growth: an ageing population, slower labour market growth, more restrictive banking regulations and climate change policies which will raise energy prices and absorb hundreds of billions of pounds of capital investment. To date, the coalition government has done little to address these issues and the costs they impose on the wealth-creating private sector.
If GDP growth (and therefore tax revenues) proves to be significantly lower than projected, the budget deficit will remain at dangerous levels in 2014/15. Given the unreliability of economic forecasts, it would have been prudent for the Chancellor to make far deeper overall cuts than he announced today. He could then have reduced taxes with a condition that such a move would be reversed should the public spending cuts not be delivered. Of itself, tax cuts would have given a welcome boost to growth; and the possibility of their reversal if spending cuts were not delivered would have concentrated the minds of ministers.