Saturday, January 25, 2014

Balancing the budget, or is it merely juggling with Balls?

The news that Ed Balls is promising that, if elected next year, Labour will achieve a budget surplus within their first term is interesting. That isn't to say that I particularly disapprove of the notion - it is sort of laudable to have such an aim. The catch, however, is how one achieves it from where we are now, and what impact it will have on those most affected by the measures deemed necessary.

The total lack of clarity on whether this means higher taxes or further spending cuts makes any judgement on the credibility of the promise quite difficult. But you can consider the relative benefits and penalties of each option to see how likely they are and what compromises might be necessary.

Perhaps a nice cup of tea will help, Ed...
Economic growth might, in itself, help to close the gap if it feeds into tax revenues. However, unless tax revenues grow faster than the rate of inflation, without further real terms spending cuts it won't solve the problem, and the required growth in tax revenues is surely too big to overcome the current £96 billion budget deficit without any other adjustment.

He might choose to increase taxes, but is somewhat boxed in by previous statements. Labour's criticism of the increase in the standard rate of VAT to 20% surely means that increasing that isn't a runner, and raising taxes for 'hard working families' would be particularly difficult given how hard they've pushed the issue of the 'squeezed middle'. That doesn't leave very many people to 'squeeze until the pips squeak', and a lot of the really wealthy are potentially mobile for tax purposes. Just how much more can you extract from the rich, or from further enhancements to the resources that HMRC has to pursue the non-compliant?

It therefore seems likely that spending cuts will need to be made in order to fulfil the commitment, but where from? Can a Labour government not commit to protect the NHS and what will be the cost of doing so given inflation rates in the healthcare sector? We can, if Rachel Reeves is to be believed, expect cuts in some benefits, although unless the protection of the state pension and benefits for the elderly is ended - not very likely, given their disproportionate influence on party policies - that might not be enough.

And such uncertainties play into the hands of Labour's opponents, as it means that they can simply quote a shopping list of possible cuts that will hurt potential Labour supporters or, if they assume that Labour aren't serious about cuts - and Labour would need to establish some credibility to challenge such an assumption - a cocktail of potential tax increases would be pretty toxic too.

So, I'm a long way from asserting that Ed Balls doesn't mean it, or is anything other then sincere in his intentions. It's just that, if Labour are going to continue to assert that they will be tough on spending whilst opposing every specific measure, they're going to have to come up with some answers eventually. The clock's ticking, Ed!...

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