Allister Heath

The Budget

Darling dives into the Labour arsenal of debt and tax concealment tricks

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As valedictory Budget statements go, this one did not disappoint. Alistair Darling may lack Gordon Brown’s verbal chutzpah, but he made full use of Labour’s arsenal of debt and tax concealment tricks, all of which have been carefully honed by this government since 1997. The most important points were buried in the fine print, missing altogether or assumed away thanks to growth and revenue forecasts so optimistic that they would have made even Lehman Brothers’ accountants blush.

The central ‘achievement’ of this Budget — that the deficit this year will be £167 billion rather than £178 billion — is something which any self-respecting Chancellor should be deeply ashamed about. This sum still represents an overspend of 11.8 per cent of national income, the highest which Britain has known in its peacetime history. The national debt continues to explode. Interest payments on the national debt jumped by two thirds last month to £3.6 billion, the fastest rise on record. Already British taxpayers are spending more on government debt interest than on defence or schools.

The Budget’s claim that the deficit would drop to 4 per cent of national income by 2014-15 is highly implausible. The spending cuts implied remain fuzzy, while the assumption of what David Cameron has rightly derided as a ‘trampoline recovery’ is too good to be true. The hidden subtext is clear: there will have to be substantial new and as yet unannounced hikes to tax rates if Labour is re-elected, as well as equally secret spending cuts.

The grim truth — recognised by markets the world over — is that Britain still lacks a credible, detailed and explicit plan to stabilise the national debt. Producing one will be the first priority of a Conservative government — and, for that, they need to be honest about the causes of the crisis. In the 1970s recession, four fifths of the deficit was caused by falling tax revenues. Today, just a third of the deficit can be blamed on the plunge in tax receipts. Contrary to what Mr Darling implied, the remaining two thirds is caused by government overspend, which is what needs to be tackled.

The Conservatives must move to reality-based budget forecasts, and this means rooting out the fake, near-fraudulent assumptions which Mr Brown programmed into the Treasury to justify his extra spending. Mr Darling’s whole Budget was predicated on the absurd notion that Britain’s trend economic growth rate is 2.75 per cent a year. Yet the UK has never achieved this in recent history, even before one includes last year’s collapse. Growth between 1972 and 2008 was a mere 2.2 per cent a year; and just 1.5 per cent in the pre-crash years of the last decade. A realistic forecast for British economic growth will place all the greater emphasis on the need for cuts.

George Osborne’s stated aim is to ensure that Britain avoids a credit downgrade. This, in effect, means ensuring that national debt stays below 90 per cent (Mr Darling’s 75 per cent forecast is not credible). No country with a national debt rating above this point has an impeccable credit rating. Just how a Tory government could arrive at this is a matter for debate but we should assume that — alas — tax will be hiked yet again by about £15 billion a year. Top earners are already squeezed as much as possible so ordinary voters will have to pick up the tab this time around. Likely tools include a rise in VAT to 21 per cent or an extension of the current 17.5 per cent rate to all zero-rated items, such as food, children’s clothes and even this magazine.

Yet squeezing spending is the real way forward. The Tories will have to chop at least £6 billion from Darling’s Budget in 2010-11, followed by even steeper reductions every subsequent year so that cumulative cuts hit £30 billion in four years’ time. Total spending would have to fall by about 1 per cent per year for the first Tory parliament. Given that debt interest will soar and that the NHS budget is protected, and that Mr Cameron has pledged to double the international aid budget, cuts of about 20 per cent would be imposed on non-protected areas like policing, schools and defence. This would be the minimum required to save Britain from fiscal Armageddon.

Achieving this will be tough but — as demonstrated in Ireland, Canada and several American states — such cuts are possible. All public sector wages should be frozen for two years at least, not increased by 1 per cent as Mr Darling wants. Then the Tories should conduct a forensic audit of all spending and make a list of non-jobs and ineffective government programmes that should be shut down. Government departments should then be asked to make efficiency gains, cutting their remaining running costs by up to 10 per cent without affecting their output. The private sector’s experience shows that this ought to be manageable; and departments have absorbed massive funding increases in recent years without showing much for the extra cash.

In the longer term, structural reforms are needed to keep spending under control. The public sector’s generous pensions are unfair and unaffordable. Welfare reform should come next: spending on benefits accounts for an absurdly high 13 per cent of national income and 28 per cent of public spending. Middle-class voters pay lots of tax and pocket lots of benefits, which makes no sense. Cheaper to cut out the middleman and let people keep more of what they earn.

The Tories will have a fiscal imperative to tackle welfare, perhaps the biggest waste — not just of money, but of human potential. There are just under six million adults on out-of-work benefits, a million of which have been on the dole (of various kinds) during every one of the Labour years. Any proper long-term plan to shrink the size of the state will have to find a way of moving millions of people stuck on welfare back into work and eventually also to harness new ways of funding healthcare and pensions.

The mission is to cut back the size of the state, so its spending is once again below 40 per cent of national income (it is now on 52 per cent according to the OECD, having risen faster in the last decade than in any other rich nation). Last time Oliver Letwin mentioned such a goal — during the 2001 election campaign — he went into hiding. A shame: he was right all along. As Mr Cameron said in his response to the Budget, Labour’s spending has (almost) bankrupted the country.

The next budget will likely be delivered by Mr Osborne in June. It will have only one salient point: the speed and ambition of his deficit elimination plan. Everything is dependent on how the markets respond to it. His mission will be to identify and root out the fairytale assumptions that littered Mr Darling’s Budget — replacing them with a credible route back to fiscal sanity. But if he fails, we will face a fiscal, gilts and sterling crisis — with unfathomable consequences for Britain’s prosperity and standing in the world.

Allister Heath is editor of City A.M.