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Osborne right to stick to deficit reduction, though much more to do

    Ryan Bourne, Head of Economic Research at the Centre for Policy Studies reacts to the Autumn Statement 2013:

    “The upturn in the economy this year has been welcome and is reflected in the improvement in both the OBR’s improved growth forecasts and overall government borrowing figures. But we agree with the OBR’s judgement that this is a cyclical upturn. In fact, the OBR’s current forecasts show the underlying structural deficit will be higher as a proportion of GDP in the next two years than forecast in the Budget in March.

    The implications of this are twofold. Firstly, the Government must continue to cut government spending to try get the budget back to balance. Lots of the cuts necessary to achieve this have been pushed into the future, and the OBR estimates the deficit will only be halved by the end of this Parliament. Even with today’s improvements in the forecasts, then, the Chancellor is still going to fail to hit both his original targets for the deficit and debt outlined when the Coalition government was formed in 2010. It’s clear that fundamental reforms of the welfare functions of the state will be necessary to close the remaining gap if, as the Chancellor said earlier this year, more tax rises will not be necessary. Whilst steps like raising the state pension age are sensible long-term measures, a fundamental review of the welfare state from first principles is looking increasingly necessary in the coming decade if we are to achieve a low-tax, low-spend approach to sustainable public finances.

    Secondly, what the economy ultimately needs for sustained improvements in living standards is robust productivity growth. As yet, much of the upturn appears to be driven by consumer spending, so it was disappointing not to see more pro-growth supply-side measures to encourage business investment and productivity gains. There were some positive policy tax moves to deal with youth unemployment, business rates and freezing fuel duty alongside the ongoing competitive corporation tax rate, but the Government needs to go much further with pro-market policies on energy, planning and tax simplification where progress has been disappointing.” 

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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