PBR – the terms of the debate have changed
It is rarely that the terms of the political and economic debate change fundamentally in a Budget or a PBR. But they have this time.
Borrowing of £118 billion is at a quite staggering level. This is twice as high as John Major had in the mid 1990s and he had to introduce 19 tax rises and massively squeeze public expenditure to deal with. It took 4-6 years to get the public finances back in shape in the mid 1990s and it will take at least as long as that to do it now.
So the next government – between 2010 and 2015 or thereabouts – whoever they are – will have to massively raise taxes and slash public expenditure. They will simply have no choice.
Labour’s spending plans in this PBR involve taking the axe to public spending from 2011 to 2015. According to the IFS, if health spending is protected, then every other government department will need to have a freeze during this period. All capital expenditure is frozen. For Labour this is an extraordinary admission. It has stood for capital investment in the public services ever since 1997 and its criticism of the Tories’ lack of capital investment in the 1990s was one of the many reasons why Labour came to power. The public services and the public realm will face a massive squeeze for at least five years after 2010.
Quite frankly, the Tories would find it impossible to cut public spending by more than this amount even if they really tried.
So last week’s declaration from David Cameron that he will no longer pledge to match Labour’s spending plans is now totally meaningless. Labour has slashed its spending plans and the Tories would have no choice but to do exactly the same if in office.
Similarly, we now have Labour arguing for immediate unfunded tax cuts and the Conservatives arguing against them. The scrap of comfort for Labour is that they can now present the Tories as ‘indifferent’ to the recession and as the ‘do nothing’ party.
The end of new Labour with the introduction of a 45 per cent tax rate for high earners and the reduction of personal allowances over £100K? Yes and no. Labour had to raise taxes and given that the bankers have got us into this mess, there will be little sympathy for higher earners right now. The rise in taxes for high earners has been supported by 70 per cent of respondents in recent opinion polls. This allows Brown to play to the base of the Labour party at an opportune time. But it is not the end of new Labour – Brown and Mandelson helped to create it and they are not burying their principles now – just updating them for troubled times.
The Tories have a fantastic opportunity to attack Labour’s stewardship of the country’s finances – presiding over record levels of debt and the worst recession since 1991–93. George Osborne has done a great job in the last few days on this which has made up for his other recent difficulties..
But the Tories’ problem is – what would they really do differently? And why didn’t they spot these massive problems earlier?
The polls will be interesting in the next few weeks. Will the public be horrified at the level of debt and blame Labour? Or will they regard the devil they know in Brown / Darling as best placed to deal with the current crisis?
Over the longer term it is unlikely that people who have lost their jobs and their houses will be grateful to the government. But an election in 2009 (still a possibility) or in 2010 now looks closer than it did only three months ago as Labour’s aggressive and proactive handling of the economic crisis demonstrates firm action to the voters and the Opposition has failed so far to set out a clear alternative economic recovery plan.