Ryan Bourne

‘Plan B’ is not the answer

Is George Osborne’s plan working? You can see why his enemies are circling. If you take his own definition – his ‘fiscal rule’ that the debt/GDP ratio should be falling by the end of the Parliament – then no. But this is mainly because Osborne has been flexible – some would argue too flexible – following the eurozone crisis and high commodity prices, which have hampered growth prospects through weaker-than-expected net trade and higher than expected inflation (see the OBR yesterday).

Last autumn, the Chancellor had a choice between more cuts or more debt. He chose more debt, and stuck to his old spending plans knowing that the growth (and tax revenues) would not be as he had hoped. He chose to abandon a ‘deficit reduction’ policy, in favour of a ‘sticking to spending plans’ policy. That’s why his so-called ‘sado austerity’ will add over £605 billion to the national debt by 2014/15, with no balanced budget in sight until well into the next Parliament.

And let’s not pretend that Alistair Darling would have done it so very differently. Remember, the Coalition has so far hiked taxes and slashed investment spending, whilst actually increasing current spending. Yet the investment cuts were inherited from Darling, he’d have hiked National Insurance, didn’t oppose the 5.2 per cent benefit rise this year, and would not have prevented the external forces we’ve seen. Whilst it’s ironic the Coalition’s planned borrowing outturns are now similar to Labour’s 2010 forecasts, comparing the two is meaningless given the changed circumstances. The fact is, as the IFS has outlined, Labour’s 2010 plan would have entailed even more borrowing than we have seen so far.

At this stage, supporters of more stimulus spending make a leap of faith. ‘Ah,’ they say, ‘but given the bond markets haven’t reacted to the higher-than-expected borrowing so far, and interest rates are low, then we could spend even more without risking a crisis of confidence’.

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