Why George Osborne must keep on wielding the axe
23:36 GMT, 5 December 2012
Few chancellors of modern times have had less room to manoeuvre than George Osborne. He is a solo navigator through the deepest British recession since the Second World War, attempting to repair a broken and morally defunct banking system and weighed down by a meltdown in the eurozone over which the Government has no control.
Yet there is no escaping the fact that Osborne and the independent Office for Budget Responsibility, which produces his economic forecasting, have been off beam in their projections for the nation’s return to prosperity.
The failure of the economy to expand at all in 2012, and the slow growth expected over the next five years, means that Osborne will be borrowing 48billion extra between now and 2017-18.
No escape: The slow economic growth expected over the next five years means that Osborne will be borrowing 48billion extra between now and 2017-18
Moreover, like the Labour Chancellors before him, he made a budgetary promise when he came to office that he is now struggling to keep. Even after the terrible sacrifices made by the British people, at all levels of society, in the past two years, the national debt – the total sum of all borrowing down the decades – will not start to shrink until 2017.
The difficulty with taming the awesome debt levels he inherited, which will peak at 79.9 per cent of the total production of the whole economy in 2015-16, could damage the Government’s claim to be turning the economy around.
It will also place the UK’s highest grade ‘AAA’ credit rating – which allows Britain to borrow at the cheapest interest rate in history on international markets – in some jeopardy.
Given the enormity of the economic challenges, and the high risks to the Conservative Party’s political future in attempting to impose cuts, Osborne is nonetheless showing admirable steadfastness in tackling the budget deficit.
Rather than recklessly chasing the rainbow of high growth, as his Labour critics demand, he is holding firm by seeking to shrink the overall size of government and insisting that any measures he takes to support the expansion of the economy are fully funded.
Results: The Government's main challenge now is delivering sustained growth, however modest
He is being helped by some smart accounting, such as the decision to treat as income the interest made by the Bank of England on its purchase of gilt-edged government bonds as part of its quantitative easing operations.
But at least he is being upfront and open about it. Too often in the past the Treasury has sought to bury such devices in the small print of the official documents rather than announce them in the speech to the Commons.
The Government’s main challenge now is delivering sustained growth, however modest. Failure to do so will mean further mounting deficit and debt problems. The slower the growth, the weaker the nation’s tax receipts and the higher the welfare budget – because more are out of work – despite the new steps Osborne has taken to limit benefit increases.
The Chancellor is certainly on the right track by seeking to erase decades of expanding government. When the Coalition came to office, government was spending an amount equal to 48 per cent of gross domestic product.
If yesterday’s Autumn Statement plans prove robust, that figure will have been reduced to 39.5 per cent by 2017. Contrast this with France, where the dead hand of the vast state economy means the government spends 57 per cent of national output.
Osborne’s success in reducing the public sector is among the reasons why, despite the double-dip recession and slow growth, the British economy has been creating jobs in manufacturing and services.
Other advanced countries around the world have seen stagnating or rising unemployment, with young people the hardest hit.
Nevertheless, the case for much more determined effort to increase output, including a genuine bonfire of regulations and much bolder tax cuts – making Britain a truly attractive place to do business and invest – is overwhelming.
The boldest measures announced yesterday are rightly aimed at small and medium-sized businesses, with a near 2billion tax cut delivered over three years by raising the limits on tax-free investment in new equipment tenfold to 250,000.
The Government is also gradually lowering the headline rate of corporation tax to just 21 per cent in 2014.
Osborne, pictured yesterday with Chief Secretary to the Treasury Danny Alexander and David Cameron, has enjoyed some success in reducing the public sector
Tax cuts like these are worthy, and make it much less advantageous for big business to take the Starbucks route and invent complex devices to avoid paying UK tax.
But there would have been a more dramatic psychological impact if Osborne had brought forward the corporation tax cut to now, at a time when the country desperately needs business to return to these shores and to improve a disappointing export performance.
Much of the evidence shows that the lower the corporation and personal tax rates, the more incentive there is for companies to invest and expand, and for ordinary families to increase their spending – all of which are vital components of growth.
The Treasury has perhaps been slow to recognise the value of Britain’s strong credit rating and the ability to borrow over the long term at some of the lowest rates in history. But it is now seeking to take advantage of those rates through the Funding for Lending scheme at the banks (which offers cheaper mortgages and business loans) and by stepping up infrastructure spending and house building.
For all that, the age of austerity, which has seen household incomes fall, looks set to go on according to the latest forecasts, and will not be lifted any time soon.
And there was little opportunity in the Autumn Statement to create a ‘feel good’ factor.
Too often, Chancellors hemmed in by Treasury orthodoxy fail to act courageously. But in the past few weeks, Osborne has acted bravely in his choice of Canadian Mark Carney as the new governor of the Bank of England, and in his insistence on the dash for gas-fired power stations.
His greatest challenge remains finding the creativity to set Britain back on the road to prosperity in the teeth of serious economic headwinds.