From the day of the Budget economists have been pointing out that the Treasury's projections are very optimistic. Ruth Lea wrote, in a blog for the TPA: "There should be a health warning on the Chancellor’s forecast; “Do not believe.” What we haven't had is a concrete idea of what it will mean if things don't go that well. Today a new report for the TPA by the Centre for Economics and Business Research gives us an idea of what it will mean if the economy recovers more slowly, these are the figures:
Of course, it could be that we get the trampoline recovery that the Treasury are projecting. Recent academic research suggests that financial crises tend to be followed by far more protracted and messy recoveries than ordinary recessions though, which doesn't bode well.
The research also looks at the consequences of attempting to fill the hole in the public finances with tax hikes. The dynamic modelling, building on earlier CEBR work for the TPA in 2007, shows that the 50p rate will mean less growth and less employment, never raise any revenue and lead to £1.8 billion greater borrowing by 2020/21.
Some of the scenarios explored by this report are uncomfortable, for low tax campaigners like us as much as anyone. But it is vital that we understand the scale of the crisis in the public finances so that we know the scale of the challenge we’re facing. The last thing anyone wants is for the next government to address the public finances in a panic, pushing through clumsy spending cuts or disastrous tax hikes.
We are facing this crisis in the public finances because the Government were far too optimistic. They increased public spending on the basis that an economy which had seen the back of "boom and bust" could afford to. That turned out to be an expensive mistake and we're all set to pay a steep price. British taxpayers can't afford for politicians to make the same error again.
