Letter by IEA economists in The Sunday Times on the need to reduce Britain's budget deficit
In the absence of a comprehensive spending review, not only is there a heightened risk of the UK’s sovereign-debt rating being downgraded, with immediate consequences for sterling and the country’s debt-servicing costs, but government debt could embark on an unsustainable path, and may already have done so.
There is an associated risk to the credibility of UK monetary policy, particularly if international investors were to see the Bank of England’s programme of quantitative easing as driven by a politically motivated desire to ease the government’s funding difficulties. Mervyn King, the governor of the Bank, has called for a credible plan to reduce the budget deficit. The government has not provided such a plan, and looks as if it has no intention of doing so for reasons of political expediency.
While there is room for debate about the pace of reducing the budget deficit in the initial phases of recovery, there should be no debate about the need for a clearly set out fiscal consolidation programme for the medium term based on spending discipline rather than higher taxes. Neither the measures announced in the pre-budget report nor the government’s Fiscal Responsibility Bill provides such a programme.
We were particularly concerned that the pre-budget report announced additional public spending for later years, as well as higher taxes, at a time when the priority should be to reduce public spending over the medium term to levels compatible with the UK’s tax base. By raising marginal tax rates and the National Insurance tax on jobs, the government risks undermining competitiveness and long-term growth, making the task of reducing public sector borrowing much harder.
In the absence of a clear and credible plan from the government, we believe the Conservative party should set out its intentions well before the general election. This would give voters and markets a clear choice between a governing party prepared to indulge in risky procrastination about the scale of Britain’s fiscal problems and an opposition prepared to take the necessary action.
Tim Congdon (International Monetary Research); John Greenwood (Invesco Asset Management); Andrew Lilico (Europe Economics); Kent Matthews and Patrick Minford (Cardiff Business School); Michael Oliver (ESC Rennes School of Business);Gordon Pepper (Lombard Street Research); David B Smith (Derby University); Peter Spencer (York University); Peter Warburton(Economic Perspectives); Philip Booth (Cass Business School/IEA)