Wednesday, 26 June 2013

Spend, Spend, Spend

Today was, as you should know, the spending review for 2015/2016. Theoretically this doesn't really need to happen mostly because it is timetabling cuts during the next Parliament, but this is a very politically savy move by the Chancellor to show a plan of action to the Great British public and put Labour on the spot. 59% of the public believe cuts are necessary (up 3 % since the Coalition came to power) but more importantly only 27% of the public think austerity is wrong (down 7% since the Coalition came in). This puts Labour in a tight spot because they can longer credibly say to the public that they will increase spending. The thing the Government is bending the truth a bit on making cuts.

Osborne is being shown up by the Labour Party of the past. I would point out though that the Labour Party at this moment would come no where near to what Healey cut in his time. 

In real terms government expenditure, despite the cuts, is projected to be slightly higher in 2015 than it was in 2011. The broad cut message apart from in 2010 is that in real terms we have stayed very much the same and even went up slightly this year compared to last. But how can this be? It is true that we are cutting lots off government departments, some like Communities and Local Government is going to have over 1/3rd taken off their budget.

We are making real cuts to budgets but overall government spending is going up this year.

So what has gone wrong? Well put simply we haven't seen the growth expected by George Osborne in 2010 and thus tax revenues have been down. Thus to keep our economy going Jeffrey Gideon the Chancellor has decided we need to stimulate the economy to make sure we don't lose the tiny percentage of growth we have at the moment. Because our economy, like somebody dependant on drugs, is so addicted to state spending if we were to start to fix it there would be serious downers experienced, which are politically unpalatable according to the Chancellor.

However the growth problem and lack of revenue can be fixed by lowering tax. At a lower level more people are willing to pay and the economy grows creating even more revenue. In the medium term this will get things going again although we would have to cut a lot more at this moment. Overall however, when comparing it over the 20 or more years it will take if noting changes, we wouldn't have to cut so much because debts and deficits are being paid off more by tax income and less by cuts. Short sharp shock treatment that produces confidence by giving people more money in their pocket.

When we cut the 50p tax rate to 45p the government brought in much more revenue than we did when it was higher. 

The thing is, the public actually think we are cutting way more than is actually going on. 39% of people, a lot higher if we discount the 18% who have no idea about this in the polling data, think we are cutting too far and too fast implying that the Government is cutting spending by several percentage points each year at least. Essentially we are taking a big political hit for no real gain. The debt, which is actually the main issue is increasing too much, there is too little growth and government is still the biggest part of the economy. The deficit is borrowing for borrowings sake an important but nonetheless a side symptom of our problem. What the Government has done so far is good, but it could do better.

There is however one piece of good news. The last budget had some very tactical tax cuts. There is a new feeling of slight optimism. It will not be as great as giving people more money to spend but somehow words such as aspiration and growth mentioned very often have inspired enough confidence to possibly start some sort of private sector led growth in the country. 

The words 'aspiration nation' may just save the UK economy.

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