So says the excellent Allister Heath in a very good editorial for CityAM this morning. The article itself is not online as their website is still in development, but IMHO it deserves an e-existence so I paste some of the highlights here (my emphasis added):
January's public finances figures were disastrously poor. At this rate, borrowing will hit £100 billion this year... And [Alistair Darling's] £118 billion deficit prediction for 2009-10 will turn out to be another gross underestimate...
The truth is that even without the banks our deficit and debt would already be catastrophically high. Excluding RBS et al, Britain's public sector net debt has hit 47.8 per cent of GDP; with the gap between spending and revenues at close to 10 per cent of GDP, the national debt could soon reach 80 per cent of GDP before adding in the banks. Without radical and urgent action, we will reach Italian or Greek debt levels within five years. We also remain saddled with huge off balance sheet liabilities, including public sector pensions and private finance initiative projects.
Just as we got used to easy money, cheap credit and ever-rising asset prices during the boom years, we also grew accustomed to a public sector that was expanding by 7-8 per cent a year. It was not just the City that was in the grip of a bubble: so was the state, especially after 1999...
Now that the economy has gone into reverse, it is clear that the government is spending far too much as a share of national income... If we don't want to end up with 1970s-style inflation and the public finances of a banana republic, we will urgently have to slam the brakes on spending and return to fiscal probity.
Higher taxes, while likely whoever wins the next election, will be counter-productive. Labour's proposed hike in the tope rate of income tax to 45 per cent won't bring in any extra revenues. It could even lead to a reduction in the tax take, as the Institute for Fiscal Studies has warned. Skilled workers and many firms will relocate to more competitive jurisdictions. So the only options would be to increase direct taxation on average workers and raise value added tax, perhaps to 25 per cent. Even then we will still be facing a crippling deficit. Given how over-taxed the UK already is, this is a thoroughly depressing prospect.
