By Neil O'Brien, Director of Policy Exchange.
Before the election, there was a big political argument about how soon the government should start to reduce spending.
Labour said early action would "risk the recovery". The Conservatives said getting the deficit under control was essential to protect the recovery.
At the time a Policy Exchange report argued that that early spending cuts would promote recovery. We pointed out that delaying action would increase debt interest payments for the government, and threaten a spiral of rising tax and rising debt. We noted that there would be higher interest payments for households too, perhaps adding £700-£1400 to mortgage payments.
Who was right?
Well, a new report from the Institute for Fiscal Studies suggests that just because the coalition is taking deficit reduction seriously, Britain will waste £6.6 billion less on debt interest payments.
The IFS notes that: "gilts prices probably incorporate an expectation that the new government will adopt a more rapid fiscal tightening" In other words, although it might not entirely be due to the Coalition's tougher stance, the fact that they are serious about reducing the deficit has definitely reassured the markets, who are demanding lower interest payments as a result. There have of course, been other factors, and eurozone debt has looked relatively less attractive as the continent struggles with its own debts. But taking the deficit seriously has been a really important factor.
The IFS report notes, though it doesn't put the two together, that new figures from the Office for Budget Responsibility (OBR) show the government is paying less to service its debts: "The OBR’s projected cuts are smaller than our estimates at Budget time partly because market expectations for interest rates have fallen."
So how much has the Coalition helped to save us, just by sounding like they are serious?
According to the IFS, "The OBR forecasts that central government gross debt interest payments will rise from £30.9 billion in 2009–10 to £67.2 billion in 2014–15, whereas our calculations suggested that the March 2010 Budget forecasts implied an increase from £30.8 billion in 2009–10 to £73.8 billion in 2014–15."
In other words debt interest payments will be a whopping 6.6 billion pounds lower than expected.
Even after that saving, it will still be the case that 10p in every pound of tax you pay will be wasted on debt interest payments, rather than schools or hospitals or pensions.
However, it's worth noting that the OBR's figures are talking about what would happen if the Coalition didn't change Labour's spending plans. If the coalition government moves to reduce borrowing more quickly, as I hope it will, then we will save even more on debt interest, because we won't rack up so much debt in the first place.
So there we have it. Promising early action on the deficit is already saving us money, before the cuts are even announced. The coalition should now move as fast as possible to stop the bleeding, and get the public finances back in balance.