The Coalition 5 year economic plan – a game of two halves

The Coalition's sixty month plan could work well but it will require strong action to keep things moving.

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Green shoots. Growth will be tricky, but it's all very possible,
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Sir John Redwood MP
On 27 March 2012 09:35

The Coalition economic strategy always proposed a squeeze on the private sector for the first half of the Parliament, brought on by tax rises and relatively high inflation, followed by more of a squeeze on the public sector in the second half as a backdrop to planned private sector growth.

The latest figures show just how big is the contrast between what has gone so far, and what is proposed in the second half of this planned five year Parliament.

Let’s take public spending first of all. The years 2010, 2011  and 2012 are estimated to show growth in real current public spending of 1.5%, 0.3% and 0.5% or 2.3% over the three years. 2013 and 2014 are forecast to bring a real decline of 1.1% and 2.1%, or 3.2% in total for the two years. This produces a total five year figure of minus 1%. This as I have said before is an unusual approach, with the increases put in up front, and the cuts left for the last year, an election year.

Then there is economic growth. The economic estimates say that the UK economy will grow 0.8% in 2011 and 0.8% in 2012, but will accelerate to 2.0% in 2013, 2.7% in 2014, and finally to a lively 3.0% in 2015.  The main driver will be a pick up in real household income, as more people get jobs and as wages start to go up faster.  After a fall of 0.2% in the first year, 1.4% in the second and small growth of 0.2% in the third, real incomes are forecast to rise by 0.5% and 1.9% in the last two years.

 

This welcome return to faster growth is also forecast to bring in a surge of extra revenue. Particularly interesting are the forecasts for Self Assessment income tax, where the top payers are well represented. In 2010-11 this brought in £22.1 billion. This year a fall to just £20.1 billion is forecast, and next year a return to £22.3 billion. The following year they estimate  £22.9 billion, with a massive rise to £28.5 billion in the final year, when the full effects of the lower 45p rate will be felt and the better growth helps. I think they will be lucky to sustain higher levels next year at the continuing fifty percent rate.

Overall, Income Tax receipts stutter along for the first three years, with totals of £153.3 billion, £152.6 billion and £154.8 billion. It takes off in the last two years, rising to £165 billion and then an impressive £179.4 billion.

When I have helped turn round near bankrupt companies I have always taken the toughest actions at the beginning. I find people like to know how bad it is, and get the bad news out of the way. In the first few weeks you need to stop the money flowing out of the door. You need to stop hiring people, stop buying anything other than the essentials, defer the capital spending and stop the daily deficit as quickly as you can.  You look for assets to sell if the bank manager is knocking on the door for money. You can always spend more if you overdo the parsimony, but going back for a second round of cuts after the first treatment is not so easy and is bad for morale.

I appreciate turning round a country’s finances is different, and coalition politics greatly complicates the management task. However, we do need to ask how strong are those forecasts of cuts to come, and how realistic are the estimates of much faster growth in the closing months of the sixty month plan?

The first half has shown that carrying on spending and borrowing does not produce faster growth. It will be interesting to see if reducing the rate of increase in spending and borrowing is a better mix. I certainly agree with the official forecasters that we should get more income tax paid once rates are down a bit and thresholds up a bit. Curbing growth of spending in the public sector could be fine if at the same time the tax, regulatory and banking policies are really going to deliver fast private sector growth. It could all work well, but it will require strong action on banks, regulations, and government approvals for new projects to get things moving.

The Rt Hon John Redwood MP is the Member of UK Parliament for Wokingham and the Chairman of the Conservative Economic Affairs Committee. His articles are cross-posted on his blog by agreement.

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