Mark Littlewood: Osborne doesn’t need Plan B, but he does need Plan A+

Mark Littlewood is Director General of the Institute of Economic Affairs.

The Chancellor is right to stick to his guns on deficit reduction. The dividing line in the debate is between those who believe that spending more on the bloated public sector would assist with the economic recovery and those who don’t. George Osborne is on the right side of that dividing line. Stabilising the dire state of the UK’s public finances and providing the markets with unwavering confidence that Britain is determined not to head the way of Greece, Ireland or Portugal is a prerequisite in getting our economy onto a sound footing.

It is worth reiterating though – because the averagely interested observer might not appreciate this from the froth of much of the media coverage – that the overall cuts package proposed by the Coalition is relatively modest. Total spending will only fall by about 3.5% in real terms by the end of the Parliament and the national debt will actually grow by about £400bn. The overall financial burden we are shuffling onto our children is continuing to grow. The price they will pay tomorrow for our largesse today continues to rise. The government is slowly getting the public finances into some semblance of order. But they are not engaged in the sort of serious recalibration of the private and public sector that the Trade Unions would have you believe. And many of us would actually like to see.

It is partly because George Osborne’s savings are actually so modest, that he must not deviate from the path he has set by a single inch. Calls for a Plan B need to be roundly ignored.  And today’s analysis from the IMF should help the government dismiss such siren, often self-interested, voices.

But that doesn’t mean the Government’s strategy is complete. Normalising the state of the public finances may be a necessary condition for meaningful economic growth, but it’s not a sufficient condition.  Ensuring the country is applying the brakes rather than hurtling towards bankruptcy is a start. But it’s not enough to generate real confidence that GDP growth will soon burst through the 2% mark or rise higher – to 3% or even 4%, the sort of figures an ambitious administration would aspire to.

Both the IMF and the Office for Budget Responsibility have downgraded their forecasts recently. In 2011, growth is now likely to be closer to 1% than 2%. This doesn’t spell total disaster, but if it becomes a pattern over the coming months and years then the economy really is in a hole.

Earlier this year, the Chancellor trumpeted his budget as promoting an agenda for growth. But it was actually a rather disappointing affair.  Britain’s horrifically complex tax code has become more complicated still. Regulation has not been reduced by the Coalition. It has got worse. The “one in, one out” rule has failed. The number of bureaucratic diktats with which businesses need to contend has gone up. Employment law protections have reached a stage whereby taking on new staff can represent a serious downside risk to a company rather than a good opportunity to expand.

Feeling rather more assured that the country isn’t about to go bust is not sufficient comfort to an employer drowning under a ludicrous, accelerating tidal wave of red tape.

Don’t abandon Plan A, Chancellor, but make sure you augment it. Mere warm words about “Britain being open for business” will now fall on deaf ears. Government ministers often give the impression that private sector growth can be encouraged by verbal encouragement alone. It can’t. There needs to be a concerted, determined and relentless drive to repeal laws and regulations and to remove the dead hand of government from our wealth creators. The Coalition’s record to date in this area is feeble in the extreme and its ambitions, in so far as it has any, are modest to the point of near irrelevance. We need Plan A+ - cuts combined with a supply side revolution. Tip toeing towards a balanced budget is just not enough to set the private sector free.