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Howard Flight: Darling's last stand - The Budgetary challenges bequeathed by the Chancellor to the next Conservative government

Flight_howard_2 Howard Flight was MP for Arundel and South Downs between 1997 and 2005, is a former Shadow Chief Secretary to the Treasury and Deputy Chairman of the Conservative Party, and is now chairman of Flight & Partners Recovery Fund.

Notwithstanding what was essentially a “non-event”, important political and economic points drop out from the Budget and the associated data and reactions to Alistair Darling’s efforts.

Firstly, while Darling was for ten years “Brown’s poodle” and his Budget proposals were essentially political positioning, he will have earned some “brownie points” with voters.  In part, clearly a substantial “focus group” exercise had been undertaken to identify within the very limited scope, what improvements might appeal to voters.  

Suspending Stamp Duty on houses up to £250,000 for first time buyers - stolen from the Tories - and albeit at the 5% Stamp Duty expense for people living in London, will buy some voters. Doubling the limit to £2 million for the 10% rate of CGT for small business owners and doubling annual investment allowances to £100,000 will be popular with small businesses.  Increasing the minimum wage by 2.2% - albeit economically wrong – will be welcome to low income earners.  More widely, I expect Darling to get credit for being perceived as doing his best in a very difficult situation and not using standard, “Brown” tactics of blatantly misleading people.

The Conservative attack should be on Brown and his record of disaster and, in my view, should largely ignore Darling.

Secondly, most of the big, financial and fiscal points have already been extensively picked over.  Self-evidently the planned public sector cuts of £23 billion per annum and capital spending cuts of £15 million were not really credible where they neither specified nor included what public sector activities and organisations are going to be cut.

As a matter of economic principle, reducing the unaffordable deficit needs to be effected by cutting public sector expenditure and not, by tax and NI increases of £19 billion per annum, which will serve as a drag on private sector expansion and recovery.

The reality is that public spending is forecast to rise by 2% next year in real terms, i.e. at least 4% in money terms, where it should be reduced in money terms.

Ordering banks to lend more is likely to prove a gimmick and, moreover, the targeted figure is for gross new lending (where voluntary or involuntary repayments will make the net new lending much lower).

Notwithstanding Sterling’s depreciation over the last 2 years the external trade balance is forecast to rise by 20% to £40 billion this year – an important and often overlooked measure of the imbalance of the UK economy.

Despite Darling’s best efforts to craft plans and announcements to get the support of financial markets running up to the Election, it was not surprising that he got the “thumbs down”.  Essentially, his plans lacked the necessary commitment to reducing massive public sector overspending and waste.  In Roger Bootle’s words, it failed to address the essential problem of “a bloated public sector soaking up resources, while the tax consequences of this will deter effort and enterprise”.

The particular issues on which I would focus are:

1. A central item of data emerging on the public sector as part of the Budget analysis, is that average public sector pay is now £27,700 per annum compared with average private sector pay of £25,000 per annum – i.e. 10.8% higher.

With hugely better pension provisioning, shorter hours and (normally) better security of employment, it is an economic fact of life that the relationship should be the other way round – that average public sector pay should be 5–10% lower than average private sector pay.  That it is 10.8% higher demonstrates, firstly, the extent to which the Labour Government has been in thrall to the public sector trade unions: and secondly and more fundamentally, that if the relationship were as it should be, we would not have a major public sector spending and borrowing crisis (The overwhelming majority of public sector expenditure is on pay; 10% of e.g. £650bn = £65bn).

Where many in the private sector cannot expect pay increases, it is unacceptable that the public sector is planning for a further 1% pay increase (which under Labour would certainly be exceeded).  Like Ireland, the UK public sector needs pay reductions to bring back remuneration to where it ought to be – 5–10% below average private sector remuneration.

Here is perhaps the biggest challenge and opportunity for an incoming Conservative Government to sort out the public finances speedily.

2. While Whitehall is certainly capable of being downsized, addressing and sorting out the public sector is not, primarily, about trying to move 15,000 jobs out of London and down sizing Whitehall.  There is also the practical point that an incoming Conservative Government will need an effective Whitehall to organise, manage and implement a radical review of the public sector and public spending.

What is needed is cutting out the areas which the State should not be involved in; getting rid of duplicated expenditure and expenditure which adds little or nothing to the economy and ending the Labour Government’s expenditure which has been designed, essentially, to buy votes.

The figures for public expenditure are of themselves telling.  Debt interest has already risen to £43 billion – over 6% of total spending, and will rise to £73 billion in 2014/15.  Health expenditure is up nearly five times since 1997, with no commensurate increase in the services delivered.  Biggest of all, welfare expenditure, as reported, is running at £196 billion plus £36 billion on social services.  The figures do not include tax credits of over £5 billion per annum, which are accounted for as a deduction of tax revenues.  State pensions (which could be more generous) cost of the order of £60 billion per annum. 

What needs analysing is where the balance of £175 billion is going.  As the moderate Roger Bootle has also commented, “I surely cannot be alone in feeling thoroughly fed up with the countless millions of pounds thrown away to “help” people to overcome some problem or other”.  The UK economy simply cannot afford the growing welfare dependent “under class” which has developed under Labour, locked into dependence to their own detriment.  It is in this territory that the Brown Government set out deliberately to buy as many votes as possible and where an incoming Conservative Government needs to examine and appraise very fully what welfare expenditure is genuinely needed, “Beveridge Welfare Net”, protection; and what has become both socially and economically damaging expenditure and constituting “ripping off” the system.

Economies can and should be made in public sector pension costs, education, health and wasted MOD procurement expenditure, but it is only commonsense to first look hard at the area consuming overwhelmingly the greatest part of public expenditure (33%), and 150% of income tax revenues.

3. The figures also reveal the extent of the increase in UK payments to the EU.  Alarmingly, these have risen by 145% since 2008/09 (£3.1 billion) to £7.6 billion in 2010/11 – also £800 million larger than forecast last year.  This is substantially the result of Blair and Brown giving away, to no benefit, the rebate painfully negotiated by Lady Thatcher.  More fundamentally, what is the UK getting for this expenditure?  The nightmare web of law and regulation forced on the UK economy by the EU is simply damaging our ability to recover and grow, while the corruption and waste in Brussels goes unchecked.


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