Budget Proves Government Cannot Control Public Spending

by Dr. Ros Altmann

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Summary:
This Budget has been a continuation of the fantasy approach to sorting out our long-term problems. Some tax increases, but also some spending increases and then just hope that the economy recovers enough to sort out the deficit. The figures are not credible, but markets may look beyond this Budget and anticipate the real measures to come after the Election. Don't be fooled by a few giveaways - the take-aways are coming. If we do not cut spending, interest rates will rise and the cost of debt servicing will increase, thus leading to a vicious spiral, such as we have seen in Greece. Markets have given us the benefit of the doubt so far, but this cannot last for ever. The reality is that we have been living beyond our means and must cut back spending to affordable levels. Sadly, the Government has proved itself incapable of cutting spending. That is how we ended up with such a crisis - by encouraging too much spending and borrowing at both public and private sector levels. We have to live within our means and the sooner we start recognising this, the better. Government has to lead us on this course, but it seems incapable of doing so thus far. Even the banks are being allowed to take more of our national wealth and policy is compromised by the need to increase bank share prices above the overpriced levels that taxpayers were forced to pay for the shares we bought in RBS and Lloyds. What a way to run an economy - keep on spending, hope growth will come and gamble billions of our national wealth on a couple of companies in the stock market!

Details:

Government cannot be trusted to sort out our dire deficit problem
How long can the Government pretend that it really can be trusted to sort out the dire financial situation facing our economy? The Chancellor announced that there are tough choices ahead, but in fact this Budget has ducked the hard choices altogether. The Budget is long on politics and short on economics.

Three-legged approach to sorting out our problems:
Alistair Darling today said that he would deal with our economic problems via three routes

  1. raising tax
  2. cutting spending
  3. benefiting from economic growth

But there is only one leg of the stool, so it could well fall over
However, the only part of this strategy that has been secured is the first. Tax increases have been announced. But this is the easy part of public policymaking and in any case the tax rises announced are nowhere near sufficient to deal with the deficit.

What about the other two legs of the stool? When it comes to cutting spending, just look at the figures and you will see that actually even next year spending will be increasing by 2%. And then he is hoping that growth will come through to bale out the economy thereafter.

Government seems incapable of cutting spending - it only knows how to spend more and then hope for the best
The Government has proved it is totally incapable of cutting spending, even when we so desperately and obviously need to do so. The Chancellor has talked about the dangers of cutting spending too quickly, but he is not cutting it at all - in fact he is increasing it! He talked about 'efficiency savings' and restricting pay rises - as well as public sector pension changes. None of these are actual cuts. In fact the Government has abandoned its comprehensive spending review in the face of the economic downturn saying it is 'too uncertain' to be able to outline spending plans. Surely this is the time when it is most urgent to do so. The Chancellor, even in the face of the biggest peacetime deficit, says he will not cut spending yet and outlined a whole range of spending increases.

He is relying on a strong pick up in growth coming through. In other words, crossing his fingers and hoping for the best.

We cannot go on like this - gilts market will eventually force rates up and worsen the deficit
If the Government does not get to grips with public finances and set us on a sustainable spending path, then sooner or later the markets will force rates up. That itself will worsen the deficit and cut growth prospects far more than would be the case if we took some tough decisions now.

Banks are taking us all for a ride
Take the situation of the banks. The measures announced are half hearted and offer no real comfort to taxpayers at all. The fact that we have received more than expected from the tax on bank bonuses means that bonuses were higher than expected! The 'commitment' by RBS and Lloyds that they will lend £94billion, but firstly, this figure is a gross figure, not a net figure as the previous commitment was and secondly, the banks did not meet their previous commitments anyway and there has been no penalty on them for that.

The Government has put itself - and all of us taxpayers - in a dreadful Catch 22 position and given the banks a 'heads I win, tails you lose' option. The Chancellor says that taxpayers will sell the shares which the Government bought at hugely over-inflated prices and eventually get their money back. In order to do this, the Government must help the banks make good profits so their share prices can recover! Yet at the same time he wants to suggest to taxpayers that he will ensure that the banks 'behave responsibly'. These conflicting objectives cannot be squared. Either the aim is to help banks make big profits and increase their share prices, or the aim is to force banks to operate more in the public interest and support the economy and businesses who so badly need credit to grow. So far, the measures have all ended up favouring the banks and penalising taxpayers or those borrowing and saving, who have to pay higher charges or accept lower returns.

Nothing for pensioners or savers and no annuity reform
There are no new measures on pensions, apart from extending the higher winter fuel allowances and inflation linking the ISA allowance. I guess the Government is far more concerned to get people borrowing and spending, rather than saving. A radical reform of the pension saving system and of the state pension could, however, really reform the future of our nation. A review of the default retirement age has already been announced - but it should have been scrapped long ago to enable people to keep working if they want or need to, to make up for the inadequacy of pension incomes and recognise longer life expectancies. There was also no reform of mandatory annuitisation, again this is long overdue. Pensions, pensioners and long-term care are huge issues that are left unaddressed by current policy, but they will not go away. Sooner or later we will have to deal with them.

ENDS

Dr. Ros Altmann
07799 404747


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