The extent of the problems facing the British economy in particular in the global recession are increasingly becoming apparent. Claims that it was particularly well placed to withstand the recession do not stand up to scrutiny. When I get time I will try and work through the evidence, but one only has to look at reports from the IMF or the ITEM club of economists.
Whichever government is in office after the next general election, it is going to have to raise taxes and cut public expenditure (in real terms when one takes account of the demands on services like the NHS). The key question is how one does it. Given that Dave Cameron is the most likely next British prime minister, a major economic policy speech by him last week is of considerable importance.
The only protected areas of public spending under the Conservatives would be health and the small overseas aid budget. The commitment to ring fence defence and schools spending will be withdrawn in April 2010, just before the likely election date. The commitment to sharing the proceeds of growth between spending and tax cuts has been abandoned. The priority will be to reduce the level of government debt.
It is hoped that savings can be made by scrapping the expensive identity cards project. However, Dave also pointed out that tax credits to help the poor had been extended to the point where they can reach people earning over £50,000 a year, so we can expect some cuts there.
Dave was careful not to rule out tax rises and made it clear that 'the richest in our society must bear a fair share of the burden'. Whilst the commitment to raise inheritance tax threshholds, which plays well in southern England, remains in place, the Conservatives will not reverse the 45p rate of income tax for those earning over £150,000 that is due to come into place in 2011. It's hardly punitive taxation, but it is a reversal of the policy started by Mrs Thatcher to reduce the higher rate of tax (which, in any case, has brought increasingly large numbers of people within its grasp).
The Conservatives believe that the electoral appetite of the last decade for more spending on public services has been sated. I think they are right in this assessment for a number of reasons. First, much of the increased spending does not seem to have had the desired effect if one looks at the problems at Birmingham Children's Hospital and in Staffordshire. Second, there is increasing resentment of what is portrayed by the media as a protected public sector, particularly in terms of fewer job losses in the recession and index linked final salary pensions. Dave has been able to make good use of the high salaries paid at Ofcom.
In 1997 one of the drivers that brought Labour into office was concern about the state of public services. The reverse effect is now happening. However, once a Conservative Government starts to make unavoidable savings, they may find themselves challenged by the unions and others and their popularity could quickly suffer. That is not to say that they should avoid difficult decisions and we are now getting more detail about what they would do as part of a deliberate process of lowering expectations.