Ed Miliband, in forgetting to mention the budget deficit in his conference speech, succeeded in giving it more national prominence than it would normally have. Voters have had enough of austerity and don’t want to hear there is more to come. Nor, it seems, does the International Monetary Fund; having been too quick to criticise George Osborne for cuts that it said would hold back a recovery, it was too quick in October’s annual meeting to praise him for the speed of the recovery, the fastest at the moment in the developed world, likely to be outstripped only by the US in 2015.
However, the deficit remains the country’s most pressing economic problem, followed by the housing crisis and the failure of wages to rise faster than inflation. As Paul Johnson, director of the politically-independent Institute for Fiscal Studies (IFS), has consistently said, savings (either by cuts or tax rises) after the 2015 general election need to be even greater than ones made so far.
Osborne, as chancellor, has set himself the harder target. He aims by 2018-19 to eliminate the budget deficit, which in the financial year that ended in April still stood at £107.7bn, or 6.6% of GDP. He includes in his target both current spending and infrastructure, and says that will mean cuts of £25bn; the IFS reckons he will need savings amounting to £37.6bn over the first three years of the next parliament.
That is partly because he has moved less fast than perception would have it on austerity. He appears to have been boxed in by the image of austerity; he could not point out the truth, that he was moving slower on closing the deficit than his rhetoric would imply, for fear of undermining that cause, but nor could he reap full public credit for the spending on infrastructure which was going on.
His most controversial proposal is to freeze some benefit payments for two years. Being seen to be tough on welfare has support among Tory and Labour voters, but the measure will affect millions of people, including many working poor, while raising just £3.2bn.
He would have done better to couple it with the announcement of raising the tax threshold which benefits some of the same people, but that was allocated to David Cameron’s altogether sunnier speech. However, as many noted, funding for the £7.2bn of tax cuts proposed by Cameron remains unclear.
Ed Balls, shadow chancellor, has set a less demanding target – to balance day-to-day spending of the government, not including infrastructure, and not until 2020. The IFS reckons this would mean a £28bn reduction in cuts than under Osborne’s plan. But the only clear tax or saving measure he announced not already earmarked for a purpose (mansion tax proceeds would go to the NHS) is a cap on child benefit that would save only £400m.
They are both right that the deficit still matters. It is better for the UK to spend its money on public services and new infrastructure than on interest payments. When interest rates rise, as they will, interest payments will rise sharply, even if old warnings that bond markets might get jittery about the UK’s ability to meet its payments look overdone. Osborne has been right to make it a priority.
Could more infrastructure spending boost growth further – the retort Labour has used to Osborne? Yes, if it is the right infrastructure but it is hard to tell until years afterwards whether it has really boosted the economy.
The failure – by all parties – to explain the scale of cuts to come is not surprising. But it prevents direct discussion of the changes that will have to come. That is not, however, what voters want to hear, and six months from a general election, not what politicians want to tell them either.
Bronwen Maddox is editor of Prospect magazine