Credibility on the fiscal deficit requires consistency

Reports in the press suggest Sir Alan Budd, a former chief economic adviser at HM Treasury and the man picked by George Osborne to head a new independent Office for Budget Responsibility, should the Conservatives win the general election, believes the economy will fall back into recession if public spending is cut too quickly – or taxes are increased too quickly – in 2010.

At the start of the year, this would have clearly put him in conflict with Conservative policy but in recent weeks David Cameron and George Osborne have so muddied the waters about what a Conservative Government would do to reduce the deficit in 2010 that it is hard to say whether they agree with him or not. The official line has been reduced to the need to ‘make a start’ on reducing the deficit in 2010, in an emergency budget to be announced within 50 days of a Conservative Government being elected, without any indication of the possible scale of spending cuts or tax increases.

This ignores the fact that the present Government has already ‘made a start’. The standard rate of VAT was increased from 15 per cent to 17.5 per cent in January, income tax will increase for those on very high incomes from April and public spending on capital projects will fall by 13 per cent in 2010/11. The Institute for Fiscal Studies thinks total fiscal tightening in 2010/11 will be £23 billion.

Cameron and Osborne criticise the Government for not having a credible plan to reduce the deficit, but their own lack of consistency means they too lack credibility. As well as shifting their position on public spending in 2010, they have not told us how much discretionary fiscal tightening they think is needed in total, over how many years they would implement such tightening or what mix of tax increases and spending cuts they would use. They also express a desire to avoid some of the Government’s measures to reduce the deficit – such as the planned increase in national insurance contributions in April 2011 – without saying what they would replace them with.

Credibility on the fiscal deficit requires consistency and a clear set of plans. So far, the Conservatives have offered us neither.

Tony Dolphin, senior economist, ippr