The Age of Austerity

At some stage in the next week to ten days I expect George Osborne to emerge from No.11 Downing Street, looking even paler than he usually does, to announce that the nation’s finances are in even worse shape than he feared.

Deep down we all know it is bad, but it is still not clear what our new Coalition Government is going to do about it and, ahead of the late June Emergency Budget, mixed messages abound. I expressed some doubts in this blog during the Election campaign that Cameron & Co could squeeze efficiencies on the scale outlined from public services such as the NHS. I was also sceptical that capping top executive pay in the public sector would bring in more than a pittance. It appears that current estimates suggest such a cap would bring down the debt by a whopping £15 million next year. Yes, million not billion.

The International Monetary Fund (IMF) in its United Kingdom survey last year said this, and bear in mind that this was before the Greek crisis struck. “Should fiscal sustainability come into question, interest rates would rise despite monetary easing efforts, the ability of the government to provide support to the financial sector would be severely limited, and pressures on the currency could emerge. To limit such risks and increase resilience to shocks, there needs to be a credible commitment to reverse the deterioration of the fiscal position in the medium term.”

The key word here is ‘credible’. The international financial markets are looking for a robust plan to reduce UK debt. Tokenism will not cut it, we need clearly identified areas to reduce spending and increase revenue, without damaging the recovery (talk about balancing acts). My own view is that there is now a compelling argument to raise VAT as the UK has one of the lowest rates of VAT in Europe at 17.5% compared to 19% in Germany, 19.6% in France and 25% in Norway and Denmark.

Again however, Cameron, at the weekend, appeared to rule this out. Is there news management going on here? Deny a rise in VAT until the full state of our finances become clear and then say “we had no choice.” I suspect this is the case.

In the background lies the IMF and the secret fear of all Chancellors that they will be forced to do a Denis Healey and have to turn around at Heathrow Airport in full glare of the cameras for emergency meetings with them, as in 1976. Ultimately, it is far better we deal with this ourselves rather than let these slash and burn merchants in the door. Just ask the Greeks.