Ten things about the British Conservative Party’s deficit reduction plan

Tim Montgomerie

On Monday I looked at lessons from the UK Conservatives' path to power. Today I examine their deficit reduction plan since entering office. Since forming a coalition government with the Liberal Democrats, the UK’s Conservative Party has begun a four year program of spending cuts and tax rises, rejecting the preference for fiscal stimulus of the defeated government of Gordon Brown.

Lady Thatcher joined David Cameron, at 10 Downing Street, shortly after the new Prime Minister was elected in May this year.

George Osborne, Britain’s Chancellor of the Exchequer, wrote about his deficit plans for ConHomeUSA last week. Here are ten things that American conservatives should know about the UK government’s program of deficit reduction.

(1) The new Conservative-led government rejects the idea of using the deficit as a fiscal stimulus: David Cameron and George Osborne argue that government borrowing crowds out private borrowing. They believe that low, stable interest rates provide a better path to a growing economy than bigger government.

(2) The Conservative Party did not detail a debt reduction plan until it got into government: In opposition the Conservatives resisted pressure to spell set out detailed measures. They only set out some indicative spending cuts that accounted for no more than 10% of the adjustment that was necessary to eliminate Britain’s deficit. They were worried that the interest groups affected by cuts would rally against them.

(3) George Osborne promises to eradicate annual borrowing by 2014/15: Britain’s total debt burden will nonetheless grow over this period. Only if Britain can return to surplus after 2015 will the national debt burden start to fall.

(4) Approximately 80% of the fiscal adjustment is occurring through spending cuts and 20% through tax rises: This four-to-one ratio is the ratio recommended by the OECD and has meant the Conservatives have introduced higher taxes on top earners, London’s banks and capital gains. This has raised concerns about UK competitiveness.

(5) The welfare budget is being cut most as the government promotes work over welfare: The Coalition government is arguing that a nation’s compassion should not be judged on the basis of how much it redistributes from top earners to non-earners but in how it helps those who are able-to-work to get work, acquire new skills and to support their families.

(6) Healthcare and pensioner benefits were excluded from the austerity measures: For largely electoral reasons, the Conservative-led government wanted to protect key voting groups, including users of Britain’s National Health Service and also the age group most likely to turn out to vote, senior citizens. The government therefore protected the NHS budget, even though it was the one that grew fastest during Labour’s thirteen years in office, and also the benefits that go to pensioners, even though pensioners are now disproportionately wealthy in modern Britain.

(7) The defence budget has been cut and the international aid budget has risen: This shift in spending is happening as part of the new British government’s belief in the importance of soft power and conflict prevention.

(8) Using the language of George W Bush, Conservatives have promised not to balance the budget on the backs of the poor: Analyses of the redistributive impact of the budget measures do show, however, that the very poorest are disproportionately hurt if only tax and welfare affects of austerity measures are considered. The very poorest do not fare disproportionately badly if the impact of the protected schools and health budgets is also analysed.

(9) There is no frontloading of the spending cuts: The spending cuts will be as great in year four as in year one and may hurt even more then – in what will be a run up to the 2015 general election - because the lower hanging fruit within government budgets will, by then, have been plucked.

(10) The Coalition government has not used the crisis to radically restructure the tax system in favour of growth: It is not restructuring the tax system – financing, for example, lower taxes on income and investment with higher taxes on property and pollution. The British Government is, however, undertaking big reforms to schools, hospitals, welfare and policing.

Comments

[Pilko]

Programme - you're English after all.

[Henry Mayhew]

Yes. Before the election I asked Mr Cameron to fess up that his deficit reduction plan was too weak or just dishonest. For some reason he disagreed with my now proven analysis.

Actually, less than frank politicians aren't all bad. At least he got somewhat elected so is now in post.

Perhaps the non-Eton-educated public ARE too stupid and cowardly to handle the truth and need Mr Cameron's approach.

[Ken Stevens]

"..even though pensioners are now disproportionately wealthy in modern Britain..."
???!!!*@#

Some are, many aren't.

From the link via your CH Think Tank Central piece today:

"The challenge of caring for Britain's ageing population.

Published yesterday was an extraordinarily detailed report from the Centre for Social Justice, examining Britain's ageing society.....
One in five pensioners in the UK lives below the poverty line.
The Basic State Pension (BSP), with minimum income guarantee or pension credit, is the sole means of support for a third of pensioners in the UK."

If you're referring to house value (only realisable if sold, even then living off released and declining capital because savings interest rates are derisory) then this implies that there was something wrong in at last having achieved a financial security after striving to pay the mortgage all those years.

There is also the point that even our grown up kids are needing periodic financial support from us, when we can spare it, in these straitened times ;-(

[Conservative Homer]

"..even though pensioners are now disproportionately wealthy in modern Britain..."

I think the term is Asset Rich, cash poor.

At least in my family it is. Lots of paper wealth, tied up in housing. Cash funds depleted. They have released equity, and i think this has been the best decision for them, although i understand that there are unscrupulous companies that give bad deals on this, not sure of the regulation of this industry.