For our Study Group Subject III on Friday 18th June, Michael Webster has submitted a Budget discussion brief which can be found under Pages/Study Groups/Budget 1 together with its associated Appendices 1, 2 & 3 in the right-hand column index. This has already been complemented by Michael Barker whose response can be referred to under Pages/Study Groups/Budget2 again in the right-hand index column.
The Canadian Liberal government managed to eliminate a deficit of 9% of GDP in three years from 1994 and George Osborne apparently wants to copy the example of this Canadian fiscal consolidation. However, the Canadian economy was also able to grow fast in the mid-1990s thanks to a weak Canadian dollar and its free trade agreement with the US, its major export market with an economy booming at the time. Unfortunately the UK seems not so well placed if it is looking to develop growth from exports to the weakened Eurozone and needs to look further afield.
In theory a VAT increase from 17.5% to 20% could bring in around £12 billion of additional government income. This together with an across the board 5% cut in expenditure along the lines of the Canadian model could bring the deficit into a surplus within 5 years. Whether the economy could continue to grow and not stagnate under such constraints is a moot point. Two years ago the German government was able to increase VAT by three percentage points without serious political or economic repercussions although the economy is much more export-driven than in the UK, with the Germans in general also preferring savings and investment compared with the domestic consumption-driven economy of the UK.
Our small group found it difficult to reach a consensus on the questions raised by the discussion paper with some feeling that Britain could no longer afford its costly defence programmes and should, therefore, settle for a diminished role of influence in the world. However, the defence industry is where Britain has an important competitive edge in export markets and there are important high-technology spin-offs together with higher value-added jobs to consider, if the country is to continue to grow and compete against low cost competition in export markets. There was general agreement that Health and Education should not be ring-fenced against cuts when they represent such a significant part of the government budget. Aside from whether a further devaluation of sterling should be encouraged to boost exports, a sound and stable currency is important for the future of the British economy and the enhanced role given back to the Bank of England by the government in dismantling the regulatory role of the FSA, was seen as a very positive move in that direction. Devolution of more power to local community level as foreseen by the Conservative vision of the Big Society was also supported if more government savings can be secured this way, although a lot more work needs to be done on moving this beyond the pure conceptual stage and into practical projects.
In passing, I » »d just like to say it doesn » »t matter what George Osborne likes to pretend will be the outcome of today » »s budget, the real winners will again be the banks, from whom as a culture we must borrow, at excessive interest, if we want to eat sleep and breathe. Changing anything other than that is purely cosmetic. Food for thought, y » »all!