'There's No Money Left'
David Laws, the Chief Secretary to the Treasury, arrived at his office for the first time last week, only to find a one-line letter written by his predecessor, Liam Byrne, left for him. It simply read: ‘I’m afraid to tell you there’s no money left’.
Mr. Laws said at a press conference today with colleague George Osborne, Chancellor of the Exchequer, that he had expected it to be a letter containing advice on how to conduct himself in the next few months. Instead the rest of the letter just ended, ‘Kind regards – and good luck!’
Byrne has defended this small stunt, claiming it to be just humourous; the fact is that this letter greatly represents the huge challenge the Lib/Tory coalition government has to face, in order to tackle the UK’s £163 billion budget deficit.
George Osborne has expressed his eagerness to begin working to reduce the deficit as soon as possible. His ‘emergency budget’ has been announced to be released on the 22nd June, a week earlier than the promised 50 day deadline, to which Mr. Osborne will be following through with the £6 billion cuts this year. The Liberal Democrats have accepted this as part of the coalition deal, despite their party, before the election result, advocating not cutting government spending until next year.
Mr. Laws, a Liberal Democrat, said the task ahead was ‘colossal’ and that Labour had left the public finances in an ‘unacceptable state’. He added that government reductions would only add up to about 1%. Mr. Laws will meet with his cabinet colleagues later this week to determine where these cuts will fall down on; the allocations of cuts to government departments will be announced on Monday.
Within this budget, Mr. Osborne has called for the establishment of an Office for Budget Responsibility; it will have the task of drawing up independent economic forecasts. In an attempt to stop government ‘fiddling with the figures’, Mr Osborne explained that ‘Labour's economic forecasts had mostly been wrong’ and ‘almost always in the wrong direction.’ It will produce its first set of figures on projected growth rates and the size of Britain's borrowings before the Chancellor’s first Budget next month.
The OBR can certainly be seen as a promising step in the right direction. Statistics can never be trusted, because of scepticism over reliability; how they were collected, constructed, and who they are presented by. A government is always going to want to make their figures look pleasing to the public. For example, when presenting unemployment figures, a government will always tend to use the Claimant Count over the Labour Force Survey; simply, the Claimant Count is usually lower, as it has a different definition of unemployment to the LFS. So with independent forecasters, rather than the government, predicting economic outcomes data is more likely to be from a greater reliable source.
The rise of VAT was also a move anticipated by the next government in power, in order to raise extra revenue. However, the Chancellor declined to be drawn on whether the Government will announce an increase or not.
A survey carried out by the BBC found that of 28 independent economists currently used by the Treasury to assist its forecasts, 24 said they expected the rate to rise in the coming parliament. The majority predicted that a VAT rise up to 20% will be in place by the end of 2011, to which will add an extra £11.5 billion each year to government revenue.
If this was to be implemented, any rise needs to be well-timed by the government, in order to minimise the impact on retailers. As the chief executive of Sainsbury's, Justin King, said, ‘If it is to go up from the 17.5% rate, let's get good advance notice of that and then have stability for the longer term. It's a very complex and costly thing to do for retailers to change the rate of VAT.’
Of course, there was always criticism to these cuts; unsurprisingly, today, from the former Chancellor of the Exchequer, Alistair Darling. He said that the Lib/Tory coalition was ‘playing the oldest trick on the book’ by blaming its predecessor for the state of the economy. ‘The suggestion that Treasury officials colluded with us in perverting figures is just wrong. There's a huge difference between publishing things you know are not right and publishing forecasts in the most turbulent period in recent history.’
He said there should be a plan to get borrowing down ‘over a sensible period’ and if it was done too quickly ‘there is a risk you tip the country back into recession’.
When to start cutting the deficit was one of the key election issues that Labour and the Conservatives frequently clashed on. But after Mr Osborne’s press conference today, the two compelling arguments on either side of the debate are extremely difficult to choose between:
‘If we don’t get on top of our debt, every family in Britain will be poorer and the dreams of millions of young people will be dashed. Mortgages will be higher, businesses will go bust and debt interest will become one of the largest items of government spending.
‘We urgently need to restore confidence in our economy. And we need the determination to act quickly in the short-term in order to establish credibility for the longer term. So, in the space of less than a week this new coalition government has already changed the way that Budgets are made, forever.’
Whether these decisions will greatly affect the economy for good or for bad, is unfortunately a small matter of guesswork.
