The International Monetary Fund has just presented perhaps the gloomiest forecast for Britain’s public finances so far. It predicts that by next year, Britain’s debt will stand at 81.7% of GDP, going up to 98.3% by 2014.
Clearly, such projections require tough policy actions. As the state already accounts for about half of economic output, there is little scope to start the consolidation of public finances on the revenue side. Besides, the top rate of income tax will rise to 50% next year. What would be required instead are substantial spending cuts. It is doubtful, though, that either of the two major parties will be able to deliver them.
The Labour Party is not only responsible for the spending increases that got Britain into the current situation but it was Prime Minister Gordon Brown who initiated them as Chancellor of the Exchequer. For these reasons, we cannot expect any radical policy reversal from the current Labour government.
In any case, Labour is unlikely to win the next election, which has to be called by June of next year. Current polls suggest a new Conservative government under David Cameron as Prime Minister. So the real question is whether Cameron and Chancellor George Osborne will have the courage to turn things around and fix Britain’s broken public finances.
Having worked at Policy Exchange, a think tank close to the Conservative party leadership, for some years, I have doubts whether the next Tory government will be up to the monumental task of fixing Britain. When I was in London, Tory economic policy was not only cautious but quite cowardly. For fear of not alienating voters, the Tories were unwilling to tackle Britain’s fiscal problems. For some time, they had even promised to honour Labour’s spending plans – which obviously weren’t worth the paper they were printed on.
Before the financial crisis, the Tories tried to keep everyone happy by hiding behind the empty formula of “sharing the proceeds of growth” between tax cuts and spending increases. Now that there is hardly any growth left and nothing to share, it is plain that such hollow rhetoric will not do.
To be fair to the Tories, at their last party conference in Manchester George Osborne finally spelt out that a future Conservative government will be cutting public spending. But even the £23 billion over the next five years that Osborne announced amounts to little more than a rounding error in Britain’s public finances. Even in the face of the greatest economic crisis that Britain has experienced in decades, Tory policy remains timid and unimaginative. If the Tories can’t offer anything better than managing Britain’s decline, then what’s the point of a change in government?