“Osborne’s plan for cuts imperils Britain’s recovery” says think tank
George Osborne’s determination to cut the deficit at all costs risks leaving the economy sluggish and the government still mired in debt, according to a new report from liberal think tank CentreForum.
The Conservative Shadow Chancellor is determined to be tough with the government deficit, and says that the economy can withstand the shock by turning to exports and capital investment for growth. But the report, ‘Slash and grow? Spending cuts and economic recovery’ shows how this relies upon highly optimistic assumptions. Even with a monumental collapse in the pound, there is little reason to believe that Britain’s export sector could respond fast enough to drive economic growth. Instead, this policy may just as easily weaken confidence and drive interest rates up, which would wreck a fragile recovery.
A new scheme, proposed today in a report from liberal think tank CentreForum, could stimulate the economy and rescue the housing market, all at negligible cost to the taxpayer, according to authors Steve Webb MP and Jo Holland. In their report, "Setting pensions free", Webb and Holland argue that the present rules which prevent individuals from drawing their tax free lump sum until they draw their pension should be relaxed.
Under the proposed scheme, lump sums built up to date could be used to clear mortgage arrears, to put down a deposit on a house, for a large capital purchase such as a new car or for any other purpose. With severe constraints on the ability of the Government to add further to government debt, this approach would provide a significant boost to the economy without adding further to government borrowing. Since around four fifths of people with pension funds already take a tax free lump sum when they draw their pension, early access to lump sums would not have a major effect on future levels of pension income.
“Consumption and property taxes should rise to restore fiscal balance.”
Britain's finances are in a mess, and its political leaders locked in a bitter dispute about public spending cuts. But CentreForum argues that even eight years of spending restraint from 2010/11 will not get the UK out of the fiscal hole it is now in. The report argues that since it is actually a collapse in revenues that is primarily responsible for the soaring deficit, taxes will have to rise, alongside the necessary spending cuts. But this must be done fairly, and in such a way as not to endanger the economic recovery.
The paper looks at the current debt crisis in an historical context. By contrasting it with previous fiscal crises, it shows why a return to 'fiscal activism' was needed to stave off a depression. It also points out that while Gordon Brown's debt is far higher than anything Margaret Thatcher had to deal with, today's much lower interest rates make the cost of servicing that debt manageable.
The current rules of the Stability and Growth Pact will not encourage eurozone governments to deal with their debts, argues a new report from the liberal think tank, CentreForum.
The current system doesn’t work. The pact failed to constrain eurozone governments from running large deficits, even in the boom times. It was watered down by France and Germany, and then ignored by other governments: Greece, for example, has run a budget deficit above the pact’s ceiling of 3 per cent of GDP for five of the last six years, without sanction.
It is vital that governments start to pay down their debt once the economy improves, and that their finances remain closer to balance over the next economic cycle. But as the crisis moderates, governments may again be tempted to borrow as yields investors demand fall.
In the paper, entitled 'Strengthening the Stability and Growth Pact with a common eurozone bond', CentreForum argues that governments need an incentive to balance their budgets. Eurozone governments should agree to set up a common bond system, through which a government may issue debt once it has raised taxes and/or cut spending, and its debt-to-GDP ratio is declining. A common bond would offer the most indebted governments access to a cheaper and more liquid debt market. But insisting that they make budgetary reforms before they can issue debt through the instrument should prevent them from overloading it, driving up the interest rate.
Commenting, the report’s author John Springford said:
“The German government fears that government bailouts would encourage bad behaviour. However, our proposed bond would discourage fiscal irresponsibility, as it would only be available to governments that were taking active steps to pay down debt.”
By rejecting a co-ordinated fiscal stimulus before the G20 meeting starts, European leaders are risking the chances of an early recovery from the world economic slump – and with it their own agenda of long term financial market reform. In ‘Divided we fall: can the G20 save globalisation?’, liberal think tank CentreForum calls on leaders to focus on the urgent task of ending the global recession, while resisting the temptation to return to a politically popular but economically perilous protectionism.
The paper sets out four challenges for the G20 leaders. The first two – stimulating consumer demand and recapitalising the banks – are about jolting the global economy out of a dangerous deflationary spiral. The second two – restructuring international finance and reforming the international financial institutions – are longer term reforms that must be undertaken to stop this type of crisis from happening again. But success in each of these tasks, according to CentreForum, depends on whether the G20 leaders are prepared to forsake political populism and economic nationalism to agree upon a robust and co-ordinated rescue plan.