Friday, 22 January 2010

Budget Deficit Reducing?

According to Liberal Twitter Hound, who got his information from the very reputable Institute for Fiscal Studies, the budget deficit may not be as bad as originally anticipated. Higher-than-expected tax receipts and slightly lower-than-expected public spending look to bring the budget deficit in slightly lower than the £178billion which I discussed in a previous post.

So, to give them their dues, some of Labour's economic policies seem to be working. Of course, they've been arguing all along that cutting public spending during a recession is bonkers. However, a little perspective is required.

There is a difference between public spending and loosening fiscal policy. Undoubtedly, the best way out of a recession is to cut tax. Lower taxes stimulate growth. As Winston Churchill once said, 'trying to tax your way out of a recession is like standing in a bucket and trying to lift it up by the handle.'

Now, Labour did cut VAT last year. Which is fair enough. But their policies haven't really gone far enough, for the simple reason that they can't afford any more. Loosening fiscal policy (cutting tax) is one hell of a lot easier if you have the money to pay for it, i.e. a budget surplus.

Labour have never produced a budget surplus. And yes, there was some reduction in the national debt between 1997 and 2002, but this was primarily cyclical, not structural, i.e. a result of higher tax receipts, not political will to drive it down.

The Conservative route out of recession is to curb public spending and bring the public finances back onto an even keel. There is no doubt that this is absolutely necessary. Even if the budget deficit is reduced to £170billion, the Government would still be overspending by over £3billion a week. It is an unfortunate circumstance that such curbing is planned under a recession.

The question is not really whether to cut public spending or not. It's a matter of what to cut, and most importantly, when. The Conservatives think the sooner the better. Labour think any time after the election. Both of them have their own vested interests at heart, rather than those of the State. Surprise, surprise.

The question is very complicated. But they'd better come up with an answer fairly soon.

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