Ed Miliband is taking the line that the coalition is cutting “too far and too fast”. The news that the economy shrank by 0.5% in Q4 of 2010 (zero growth if you factor in the adverse weather) is feeding speculation that the government’s cuts are endangering the economic recovery.
These growth figures should of course be viewed with caution as they are subject to revision. That said, the claim that the coalition’s planned spending cuts are responsible for last quarter’s
George Osborne has remained defiant that the coalition’s programme of cuts must be maintained and that there is ‘no plan B’. This may be the minimum approach needed to ensure that the markets remain confident that there is a credible plan to eliminate the UK’s enormous budget deficit. Osborne’s critics are at pains to stress that there should be a plan B and I happen to agree. But Plan B should be cutting spending further in order to reverse tax hikes which are damaging private businesses. For example, the coalition’s policy of ring-fencing the NHS and international aid should be reconsidered given that these areas account for nearly a third of government spending. Reversing the counterproductive rises in Capital Gains Tax and VAT must be a priority, while the incentive-destroying 50p income tax rate on top-earners should be reduced at the earliest opportunity.
The line that the government is cutting ‘too far and too fast’ may appeal to the public at large - if Labour’s poll ratings are anything to go by - but in reality continuing high levels of government spending are hampering growth by crowding out the productive private sector. The coalition must reduce spending further and faster if it wants individuals and businesses to prosper.