The Conservatives have a secret plan to save Britain’s economy. Hidden in their financial documents (that’s journalist-speak for “in the briefing notes”) is an explanation of how the opposition’s tax cut plan can be squared with gilt investors baying for deep cuts: The Tories would push through immediate spending cuts of 0.5% of GDP, or £6bn.
Sounds great. You can buy a lot with £6bn nowadays: two aircraft carriers and change, or the whole of the British bank bail-out.
But there are two caveats. And they show the Tories have got zero clue about the level of spending cuts needed to satisfy the markets and maintain the country’s AAA rating.
First, this is a one-off cut. After saving an extra £6bn in 2010-11, the Tories would splurge all future savings on the cost of reversing (“most of”) Labour’s planned National Insurance rise and a freeze on council tax. Popular with the Tory base, tax cuts.
Second, the £6bn is a one-off cut equal to 0.7% of the country’s net debt. Not the deficit, but the outstanding balance. Consider this: if you had a £250,000 mortgage and were struggling with the monthly payments, this is equivalent to making a one-off payment of £1,749, then thinking you had fixed your debt problem so you could go out and buy new iPads for the whole family every year.
Here’s what the Tories say:
This is just under 0.5% of GDP and less than 1% of total Government spending. It is the result of a twin assessment of what is necessary in order to retain Britain’s credit rating and restore confidence in our economy, and what is achievable in-year without affecting the quality of front line services…
Our judgement is that this is the right amount of additional in-year savings needed to establish credibility and restore confidence in our economy.
Are they right? Is this going to solve the the market’s perception that Britain is a worse risk than, for example, Italy? Is it going to end the risk of credit rating downgrades? Simply put, no.
Here’s the reality: the voters would not accept David Cameron and George Osborne’s efforts to sell an “age of austerity”. So the Tories have switched from fiscal responsiblity to fiscal denial, spending money the country doesn’t have in the hope that markets will forgive them. Dan Roberts summed up the optics of the Tory shift nicely in the Guardian:
Either Osborne was right that Britain’s colossal deficit threatens to wreck the economy, in which case this is a reckless piece of political grandstanding. Or perhaps he is right now that there is enough wiggle-room to give voters some money, in which case what was all that stuff about economic armageddon?
A one-off £6bn saving is neither here nor there. Luckily for the markets, Osborne almost certainly knows this and will push through a true austerity budget after the election. Unluckily for democracy, the voters won’t be told what is coming, at least by the Tories.
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From the FT’s comment section:
John Kay: The British housing market did not wreck any banks
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Christopher Caldwell: Fighting to repeal the healthcare law is no lost cause
Martin Wolf: Why Germany cannot be a model for the eurozone
Editorial: Time to pay the deficit attention
Editorial: A half-good scheme
Editorial: One careful owner
Global insight: David Gardner, Wounded Celtic Tiger shows signs of clawing back growth
Market insight: Tadashi Nakamae, How Japan could lead the way back to durable growth
Notebook: Sue Cameron, A rulebook for God and the Queen
Lex: The agenda-setting column on business and finance