Honest account

The pre-budget report must be credible, defend Keynesianism, and tax ‘bad things'

After seven months of the current financial year, government borrowing has already reached £87 billion and it is probably on course to exceed the budget forecast for full-year borrowing of £175 billion. We shall find out the government's latest estimate of this year's borrowing in next week's pre-budget report (PBR).

The government has also promised that the PBR will set out its plans for reducing government borrowing over the medium-term, including halving it over the next four years. How should we judge what the government proposes?

First, it needs to credible - for financial and political reasons. Financial markets need to be convinced that borrowing will come down over the medium-term otherwise the government risks losing its AAA credit rating. And the public are not in the mood for obfuscation; they know there is a problem and they want to know how solving might affect them. So it is important that the projections in the PBR are based on cautious estimates of future economic growth and government revenues.

Credibility also requires that the plans assume deficit reduction will be achieved by a combination of economic recovery, which will increase tax revenues and reduce spending, and discretionary tax increases and cuts in public spending.

However, to increase taxes or cut spending too soon could prove disastrous for the economy, which official figures show is still in recession. So the second thing to look out for in the PBR is a strong defence of Keynesian fiscal support for the economy at a time when monetary policy is proving ineffective. Significant deficit reduction will probably have to wait until 2011.

Third, higher taxes should fall on ‘bad things' and on those who can most easily afford them. Increases should not be introduced in an ad hoc manner, as has happened too often in the past. The PBR is the government's opportunity to set out its long-term vision for reform of the tax system, to make it more progressive and more efficient and to increase the role of environmental taxes. A concerted effort to tackle tax avoidance and to close the loopholes used by the rich to limit their tax bills would also be welcome.

Fourth, the government should acknowledge that when public spending is cut, more than efficiency savings will be required. It is unlikely that the chancellor will give much detail on spending after 2010/11, but he could adopt some smart principles that the government will follow when deciding where to cut. These should include preserving spending on investment and preventative measures, rather than ‘salami-slicing' across all areas; avoiding ring-fencing particular areas of spending (given the large increases in spending on health and schools in recent years, they should not be spared from restraint); seizing the opportunity to force through reform in areas like policing, where it is long overdue; and concentrating limited resources where they are most needed - spending cuts need not mean an end to redistribution.

In the circumstances, the chancellor has little scope for populist measures in the PBR. But he earned respect last year for warning that the recession could be a serious one, and this is his chance to earn more respect by being realistic about the outlook for the next few years.

More details on ippr's views on the fiscal outlook can be found in its new report Opportunities in an Age of Austerity

 

Tony Dolphin is a senior economist at ippr

07 Dec 2009 10:56

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Comments

• Posted by Andy Ray on 07 December 2009, 2:38:03 PM Hope Darling reads Tony's article : it's full of (pragmatic) gems!