Westminster Blog

Here’s a couple of insights from developing our deficit buster tool. They both seem to chime with the Institute for Fiscal Studies report today, which concludes that tax rises will almost certainly be imposed alongside the deepest cuts since Thatcher:

1) The political incentive will be to go faster and deeper

The package of cuts required to tackle deficit is so painful that you’d expect any sane politician to run a mile, obfuscate and delay. But, rather counter intuitively, the political imperative will be to do the opposite.

This fiscal consolidation is set to be the most sustained peacetime squeeze on public spending since the 1920s (we’ve had deeper cuts but not for as long). It covers two parliaments and at least one election after this. That means that politically, slow and steady spending restraint is suicidal. Can you imagine a chancellor delivering a fierce package of cuts for four years — then saying: “vote for me: only four more years of austerity to go”.

A shrewd chancellor will want to do the opposite: cut as deep as possible in the first year so that the situation looks much better in years three and four, with a lift from a bank sell off, better tax receipts etc — just in time for an election. The problem is the scale of the challenge. Even current spending cuts may be unachievable. The only way to reliably and quickly raise money will be……

2) Taxes are almost certain to rise

All three main parties tell you they have no plans to raise taxes. But that does not tally with what has happened in the last two attempts in Britain to tackle (much smaller) deficits.

As this chart shows, in the early 1980s and mid-1990s the tax burden rose by almost 5 per cent as a proportion of GDP. This time around taxes have gone up a bit, but strangely appear to stop and tail off from 2013 onwards. The projection looks rather like a limp banana. Do you think that will tackle the biggest budget deficit in modern times? Or does the blue arrow look more realistic, given the path taken by past chancellors?

One phrase that’s going round the Treasury is: “after the Napoleonic wars we invented income tax, after the Second World War we introduced NICS, after the Oil Shock we doubled VAT and after the banking crisis we….”