1. Focus on bringing down the deficit through spending restraint
Even on the recent optimistic forecasts of Goldman Sachs, the Government will still borrow around £105 billion this year, meaning that the pace of deficit reduction is still modest at best. The OECD forecasts a deficit of 7.1% of GDP for 2013 – extremely high in a historical context. The Chancellor should outline that the work of bringing the public finances into balance is still nowhere near complete, and that he and the Government want from here to adopt a low-tax, low-spend approach to closing the remainder of the deficit. This can be brought about by pro-growth supply-side reforms, committing to no more tax rises within the consolidation package, and for a Simpson-Bowles style commission to examine long-term measures to cut state spending (including examination of eligibility for government transfers and various models for provision of public services).
The Chancellor should not forget that his original two fiscal rules were to eliminate the structural current deficit within five years and to get the debt-to-GDP ratio back on a downward path by the end of this Parliament. These have since morphed into the Chancellor abandoning the second rule and interpreting the first as a largely meaningless rolling target. Therefore, when growth forecasts were lower than expected and borrowing higher than expected on original forecasts, the Chancellor took the advice from those who said “be flexible and just borrow more”. It would hugely undermine his credibility if, in reaction to better than expected forecasts, he decided not to aim towards his original targets and instead took the advice from many of the same people who now essentially tell him to “use any unexpected borrowing reduction to borrow to ‘invest’”. Instead he should acknowledge the front-loaded tax rises the British public had to face, highlight how the government is still borrowing too much, and commit to getting Government spending down significantly.
2. A commission to examine the long-term costs of benefits and benefits-in-kind
As mentioned above, the Government should announce a Simpson-Bowles style commission to examine long-term measures to cut state spending, in particular on the welfare aspects of the state. Though the government is seeking to restrain spending overall, it has increased the generosity of pensions, largely protected total health spending, and expanded the Government’s role in the provision of long-term care – all of which worsen the long-term outlook for the public finances. In addition, the Government have increased the generosity of childcare support and other measures such as “free school meals”.
The Chancellor is expected to highlight how a cap on overall non-cyclical welfare spending might work. But a much more strategic look on what the welfare state should actually exist to do is necessary. For example, many might consider that a welfare state should be a safety net for those who are fit to work but in short-term need. Yet housing benefit has turned into an ongoing permanent payment. Likewise, increasing life expectancy and an increasing dependency ratio means consideration is needed on encouraging long-term saving and more personal responsibility for retirement provision. This requires a fundamental rethink, not just a cap and subsequent salami slicing of various benefits.
3. Steps to ease the burden on business
Tax cuts and deregulatory measures should focus on growth and job creation. As Dominic Raab outlined in his paper for the CPS this week, cuts to national insurance and business rates are probably the most effective tax cuts the Coalition could implement at this time. Thankfully, it sounds as if the Government is going to take steps in this regard, by capping the overall increase in business rates and reducing employers’ NICs on young workers – so we await the details on these measures.
4. Energy market reform, including abandoning the unilateral carbon price floor
In recent weeks, the Coalition government have appeared to be following Labour’s lack of faith in market solutions to policy questions. This was most recently evidenced by the decision to cap the overall charges faced by payday loan companies. The Government have rightly criticised the Labour government’s energy price freeze for being an anti-market measure, but in truth the whole energy industry has been warped by more government intervention in the form of renewables obligations, the recent ‘Electricity Market Reform’ and the recent announcement on delivery of new nuclear. The seemingly endless delays in getting shale gas exploration off the ground are also problematic.
We have long argued that a huge rethink is needed on energy policy, with the adoption of pro-market reforms. But a measure the Government could take immediately is to scrap the unilateral carbon price floor, which (according to CPS research fellow Tony Lodge) means “electricity generators are paying over €18 a tonne of carbon emitted, compared with just €4 on the Continent.” It’s difficult to see how this fits in with David Cameron’s ambitions to win the so-called “global race”.
5. More supply-side stuff to raise the growth potential of the economy
Over the past three years, we’ve outlined many other things the Government could be doing to try to raise the growth potential of the economy. These sorts of reforms often get ignored when the economy is growing, but with the degree of spare capacity in the economy still unclear, it would make sense to pursue an agenda where pro-growth supply-side reforms were adopted. This might include:
- Tax simplification, as long outlined by CPS Research David Martin in his Tax Simplifier series.
- A more market orientated approach to planning, as outlined by CPS Research Fellow Keith Boyfield.
- Commitments to faster new airport capacity in the South East, in particular our recent recommendation for a ‘Heathrow Hub’.
These sorts of reforms would have much more significant dynamic impacts than the populist spending measures and schemes politicians so love to announce.