Reacting to the news that the rating agency Moody’s had put the UK’s credit rating to negative outlook, George Osborne said, “Britain has got to confront its debt problem, and the British Government is doing just that.”
This statement is at least half right. With official public sector net debt set to increase to 78 per cent of GDP by 2014-15, ignoring pension and PFI liabilities, Britain most certainly has a debt problem. The question to be answered is whether the Government is doing enough to confront it.
In his first Budget in 2010, George Osborne set out to eliminate the structural deficit by the end of the Parliament. Then he was informed by the OBR at the end of 2011 that the structural deficit was bigger than first thought. Growth forecasts were lowered. At the time, many of us at the CPS, in addition to Lord Flight, said that Osborne should have stayed ahead of the curve by cutting further, sooner, to maintain the deficit target. Instead, Osborne decided to stick by his spending plans and roll the target forward into the next Parliament.
The Moody’s report makes clear they are concerned the Government will move away from even this watered-down plan in the event of poor economic prospects in 2012. There appears to be good reason for this scepticism as well - as the IFS Green Budget made clear, so far the Government has started the process of closing the deficit through the easier method of tax hikes and cuts to capital spending. Just 6% of the planned cuts to current spending will have happened by April. With all the uncertainties in the Eurozone, and slow growth bringing pressure to ease up, it remains to be seen whether the Government will see through the remaining 94%.
This intervention by Moody’s is therefore a timely reminder that the Government is doing the bare minimum to address our debt problem. In the upcoming Budget, George Osborne must at the very least indicate that he would be willing to make further spending cuts should circumstances require. Furthermore, he must take opportunities to enhance medium-term growth prospects through the only non-costly, pro-growth policies at his disposal: supply-side reforms. Whether reforming the tax system, deregulating, labour market reforms or policies to improve international competitiveness, the Chancellor must surely see the need to be bold.