Cutting too much

One thing that has only really emerged from the budget a day or two later, after people had a chance to look at the small print, is the sheer scale of the public spending cuts being planned. In a prime example of the cynical manipulation that makes the budget statement such a farce, Alistair Darling said that public spending would grow by 0.7% a year in real terms from 2010 to 2013. In fact, that figure was misleading, as it didn't include investment spending, which is being cut massively. Overall, public spending is actually going to shrink in real terms over those three years. In fact, most of the heavy lifting in the 10-year plan to balance the budget by 2019 is being done by spending cuts, not tax increases. 

This is, to put it mildly, absurd. Those of us who remember the 1997-2001 Labour government will remember the two years when spending growth was constrained to the Tory plans, which were for low growth. Coming on the back of years of underinvestment, this 2-year squeeze caused huge problems in health and education which the government then spent the next 10 years trying to sort out - with only partial success. Well, the cuts planned in 2010-13 are much worse than those 1997 Tory plans. It's going to be a complete disaster. If people think the health and education systems of the UK have serious deficiencies now, wait until they've been completely starved of cash for several years. 

The correct response of a Labour government to recession was summarised by Tony Benn in a diary entry for December 1974. I don't have the exact quote to hand, but it was something like, "we are going to have to reduce our living standards over the next 12 months. But if we just do that by everyone taking two steps down the ladder, then the guy at the bottom is going to fall off". With cuts in public spending of this magnitude, there are going to be a lot of very poor, very vulnerable people falling off that metaphorical ladder.

The 50% top rate was a nice starting point for a progressive response to the recession, but if the government had had real guts it would have pledged to maintain spending as a share of GDP once the recovery starts, putting up taxes as necessary. The huge hole in the public finances needs to be filled by tax rises rather than spending cuts. It's a real shame that the government is running too scared to protect its legacy of increased spending on public services compared with the Tory years. As Tom Clark in the Guardian shows, if the spending cuts are implemented they'll leave public spending as a share of GDP back at roughly 1997 levels. And then, one might ask, what was the point of New Labour? A ten year diversion in between business as usual? It's a disgrace. 

Well, I got a bit of what I wanted, but only a bit

Today's Budget is, in one very particular way, the best New Labour has ever produced. The new 50% supertax on incomes over £150,000 is a welcome (if partial) reversal of the downward trend in top rates of the Thatcher years. The Institute of Directors are up in arms about it, which pretty much guarantees that it's the right thing to do. (Simon Heffer also doesn't like it - which doubly means it's the right thing to do. "Idiocy, bigotry, tribalism and sheer class hatred" - yep, I'll have some of that please.)

The supertax isn't perfect - the ever-astute Vince Cable (best Labour Chancellor we never had - yet?) has pointed out that it won't affect people who are able to pay themselves in capital gains rather than income (e.g. private equity bosses) as the rate on capital gains remains at 18%, and the government should definitely think about a 50% top rate of CGT to match. There are a lot of other tax avoidance issues to sort out as well, as Richard Murphy of Tax Justice Network points out. But the 50% top rate is at least the first step towards a sensible tax policy. And it's very unlikely it would ever have happened under Tony Blair.

Other than that, the good news is a bit thin on the ground. The government has largely rejected a further fiscal stimulus, mistakenly in my view. There is a tiny bit of extra money for the Child Tax Credit - £20 per child per year - but this is nowhere near enough to enable the government to meet its child poverty target for 2011. A bit of extra investment for green technologies, but again, very small beer - about £500 million according to Richard Murphy. Nowhere near the amount that the Green New Deal group has identified as necessary.

Of course the main reason the extra spending was so thin on the ground was because advocates of a further fisacl stimulus couldn't convince the Treasury in the face of the rapid - and continuing - deterioration of the public finances combined with the cost of bailing out the banks. Borrowing could be up to £200 billion this year - a post-war record. Bigger than 1976 when Labour went to the IMF, who were a similar wrecking crew then to what they are now. 

Given the speed and ferocity with which the public finances have unravelled, it's understandable that the Budget projects only 0.7% per year real growth in public spending over the period from 2010-11 onwards. Understandable... but wrong. 

For one thing, it's not a credible spending path. The economic growth projections that the govt published yesterday were less of a trip to fantasy island than the infamous PBR 2008 projections but they are still wildly optimistic about the pace of recovery. The truth is this: after 30 years of misplaced trust in market forces and bubble finance, the UK economy - perhaps more dependent on financial services than any other economy - has had the guts ripped out of it. Recovery, when it comes, will most likely be slow and halting. That's if it comes at all, and we don't slip into Japan-style depression. So, the 3.5% growth prediction in 2011 is cloud cuckoo land stuff.

It seems that the private sector is most unlikely to precipitate a strong recovery on its own - particularly after the Government's green industries package proved to be something of a damp squib. Instead, we need, if anything, to expand public sector investment during the recovery - focusing on building the transport, technological and skills infrastructure that will enable us to work our way out of recession. 

Taxes will need to rise by a quite substantial amount once the recovery starts, to pay for this. For sure, there is some public spending we can cut; any use of management consultants by the NHS or local councils, by example, should be banned. They're overpaid and ineffectual. The ID cards scheme and NHS IT scheme, also both completely ineffective, could be canned. We don't need to replace Trident. 

But this is small beer in the wider scheme of things. Let's not kid ourselves that it's easy to cut public spending without any adverse effects on services - there is no evidence whatsoever for that view. All the evidence in fact is that cutting 'back office' functions - the easiest target - impedes delivery effectiveness. HMRC is a good case in point; reduced to a point in which staff have to routinely cut callers off to meet government targets. 

The next few years is when we finally realise that we can't have continental European levels of public services unless we pay European levels of tax to go with them. Not an easy lesson to learn, but a necessary one. 

What I'd like to see in the Budget

There's a long list of useful things that could be in the Budget this year. Unusually, the desperate circumstances the economy finds itself in means that some of them might actually get implemented. The main thing I want to make a case for is a big additional fiscal stimulus - a lot bigger than anything we've seen so far - otherwise the economy is going to flush down the toilet even quicker. Many, including Bank of England Governor Mervyn King, have said we can't afford it. Bollocks - we can't afford not to. It's true that UK government borrowing is ballooning to huge levels, and there is a possibility - down the line - that the cost of financing the debt may become so prohibitive that the UK government becomes insolvent. But an effective stimulus should actually reduce this likelihood because the worse the recession, the more likely it is that tax revenues will reduce further and land us deeper in the public finance hole. The alternative is to go the way of Ireland - slashing public spending and benefits, sticking with the same strategy that created the Great Depression in the 1930s while penalising the poorest and most vulnerable people in society.

The Child Poverty Action Group has calculated that a £7.5 billion package of increases in Child Benefit, Child Tax Credit and Jobseekers Allowance would enable the government to meet its 2011 target to reduce child poverty to half of its 1999 level - as well as creating around 200,000 extra jobs when multiplier effects are taken into consideration. That's a more than worthwhile investment.

There are other useful things that could be in the Budget - a supertax on high earners, new suport for green technologies, wealth taxes (especially on parasites like Fred Goodwin), a complete ban on the employment of management consultants in public services... but the fiscal stimulus is what we need above all else. Ex-MPC member Sushil Wadhwani has been making the case for further stimulus very effectively. Let's hope someone in the Treasury is listening.