Darling's decisions: the verdict
Labour has got the politics and economics correct, but tough choices still lie ahead
“If there is reincarnation,” joked James Carville, Bill Clinton’s campaign strategist, “I want to come back as the bond market. You can intimidate anybody.” Alistair Darling might have been forgiven for thinking the same thing as attention focused on financial market reactions to his Pre Budget Report
. A debt crisis in Greece did not help sentiment. Yet this PBR was never going to be good news given the depth of the recession. What mattered was whether government finances were under credible control and whether Labour could avoid sacrificing economic growth and its key political priorities on a mountain of debt. Despite the strains and the challenges to come, the PBR succeeded on these counts.
The economy is suffering from the deepest recession for over a generation, after the first truly global financial crisis. The Treasury now forecasts GDP will fall by 4¾% this year, with the return to growth for 2010 at 1¼%: in April many believed the economy would also shrink next year. This recovery may be different to past examples because confidence dropped across the economy at the same time. Stronger GDP growth data this quarter and next may benefit from improving year on year comparisons.
Despite lower forecasts, the estimate of the deficit this year (2009/10) was only raised to £178bn from £175bn. There was a similar change to the 2010/11 figure (£176bn). The structural deficit (debt which will not disappear with the economic cycle) has been revised downwards from 9.8% to 9.0% of GDP (5.5% excluding investment). Net public debt as a proportion of GDP is expected to peak at almost 78% in 2014/15.
The Chancellor maintained spending plans for next year but from 2011/12 spending is flat in real terms with current spending only rising 0.8% pa, offset by a large drop in investment spending. The Institute for Fiscal Studies highlights that the total spending cut in the three years from 2011/12 is £35.7bn with the largest cut that year and much through efficiency savings. That figure contains a net £15bn of spending reductions that have yet to be identified, the IFS calculates. In the public sector, pay rises will be capped at one percent in 2011/12 and 2012/13, high salaries will be scrutinised, and the government’s pension liabilities will be controlled.
Alistair Darling is protecting spending in some key areas, after natural increases such as on debt interest and welfare. Frontline spending on schools will increase 0.7% and will be flat in the NHS, after inflation. Sure Start spending will be constant and police numbers will be maintained. The international aid budget rise to meet the target of 0.7% of national income by 2013. This means the cuts elsewhere will have to be more severe. Reductions in government spending come despite tax rises. National insurance will rise by 1% rather than 0.5% in 2011 and the temporary VAT reduction will be reversed. The inheritance tax threshold will not now be raised – a clear dividing line with the Tories. The IFS estimates the government plans to tighten public finances by £76bn, or 5.4% of national income. A Fiscal Responsibility Act, designed to reassure markets, will commit the government to halving the deficit by 2013/14.
With the economy probably only just emerging from recession, stringent measures now would risk killing a recovery. Business activity remains low and people are still losing jobs. The PBR’s commitment to get the debt down is also important since buyers of government debt are looking for a robust fiscal framework. The economics of this PBR are right but depend on some hard decisions ahead.
The politics are also along the right lines. Labour will aim to safeguard growth, frontline services, and the most important infrastructure projects. The Conservatives want to relive the 1980s but these are different times. They must say what significant action they believe the government should not have taken to help the economy. We build on years of investment in public services, evident in new and better equipped schools and hospitals for example, which will benefit this country for years to come. Labour is also taking action and leading international opinion on bank bonuses.
However, our message is not yet clear enough. Debt is high due to the financial crisis, the recession, and timely government action to combat both. With fiscal policy under firm control that should not be a major problem, but we are too often on the defensive. Labour electoral prospects must not suffer a death of a thousand cuts and the manifesto should be more than a hundred small pledges. We must avoid endless debates about cuts here and there. The debt changes much. It means progressive politics must rise to the challenge and find new solutions with a clear narrative. We need to focus on boosting productivity and changing incentives to continue the fight for equality. If we can do this we will remain the party for the future.
This article was published in Tribune on 18 December 2009.