Wednesday, 7 October 2009

Gideon's dilemma

The polls tell us that the public are in the mood for cuts, but it's one thing to be hypothetically in favour of them, it's a different matter altogether if the pain lands on your doorstep.

This was George Osborne's dilemma at the Conservative Party conference yesterday. The Conservatives have come under pressure to provide details about how they would deal with reducing the mountain of public debt, but the more detail one offers, the more hostages to fortune are provided.

It seems to me that the main problem with the speech is that it didn't go anywhere near far enough if one assumes one has to find £100bn (as a ball park figure). For example, families earning £50,000 a year (not large an amount in Southern England where one can easily have a £1,000+ a month mortgage) will lose their tax credits. However, this will only save £400m, but it still risks upsetting a group of potential Conservative voters. There has been talk of cutting tax credits and child benefit for those on over £30,000 a year which would save £13bn.

Accelerating the advancement of the retirement age to 66 is necessary in the context of an ageing population, indeed it probably needs to go to 67 sooner rather than later. However, this will not produce any savings in the medium term and may offend those affected.

A public sector pay freeze is more or less common ground between the parties, but it would affect 4 million public sector workers and their families. Talk of saving £3bn on 'bureaucracy' has little detail attached to it.

What this does lead one to believe is that the Conservatives must be contemplating tax rises and the most likely candidate is a rise in the rate of VAT, or even the removal of zero rating on some items.


Shankar said...

How fair are the claims that the Conservatives might cut spending too fast, and therby jeopardize economic recovery. I read in the Financial Times, that Angela Merkel, once renowned for fiscal conservatism, is keen to avoid such a scenario in Germany. But given Britain´s dire finances, is this basically Labour propaganda?

Wyn Grant said...

I think there is a risk, it's a fine balance to be drawn. A combination of tax increases and cuts in the public sector workforce (reducing demand in the economy) could impact on the economy. Timing is key.