Sunday, 6 June 2010

PM lays it on the line

An interview in the Sunday Times with the prime minister was undoubtedly part of the 'softening up' process for the substantial public expenditure cuts and significant tax rises to be expected in the budget.

New Labour's way out of the structural budget deficit always relied on what David Cameron called 'trampoline' growth rates which I have always doubted were attainable in the medium term and look less likely now. They also assumed that interest rates would not go up very quickly, but once they do, the cost of servicing the debt - which brings no benefits to users of public services - will also increase.

On the tax side, the prime minister refused to rule out an increase in VAT. Of course, considerable revenue could be raised by broadening its base, but some of the revenue obtained would not be worth the political trouble. VAT on books, even at a lower rate, would be portrayed as a 'tax on knowledge'. VAT on newspapers would upset the press barons. VAT on construction would upset an already battered industry. But that doesn't mean that nothing can be done.

On the expenditure side, the Conservatives intend to tackle the very large amounts paid out in disability and incapacity benefits. New Labour did start to try to tackle this, but it is a political minefield. Lower back pain can be very debilitating and mental health problems are always difficult to assess. Freezing benefits for a year would bring in over £4bn and would be quite politically popular. However, it is puzzling that the Government appears to rule out means testing the winter fuel allowance and similar benefits. Should it be available to higher rate taxpayers?

However, it does seem that quite a lot of the cuts will fall on public sector pay, public sector pensions and public sector jobs. This would bring quick returns and might be quite popular with those not working in the public sector, but would also involve the Government in confrontations with the most unionised sector of the economy.

Nick has given his own version of the story in The Observer where he emphasises the need to make cuts sensitively. It seems that Nick and David are getting on very well, texting and E-mailing each other. Nick has been round to David's for dinner (which he refused to do before the election), but Sam Cam wasn't there as she and the children have been taking a holiday in Ibizia as they face up to life 'above the shop'. Apparently, the prime minister's sleep has been disturbed by the chimes of Big Ben at night.

David Cameron has had to deal with the tragedy in Cumbria (which I thought he did in exemplary fashion) and the Sunday Times says he is already looking his age. The job certainly aged Tony Blair. It's a tough task at the best of times and times are not easy.

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