Stephanie Lis

Think Tank calls on Government to implement radical economic reforms

Chancellor George Osborne’s Autumn Statement highlighted the Government’s lack of economic credibility says the Institue for Economic Affairs

George Osborne’s Autumn Statement last week highlighted the government’s lack of economic credibility. The key issue that remains in minds nearly a week on is the Coalition’s failure to tackle the deficit.

Whilst there is no doubt that there were some positive measures, such as changes to ISAs, the scrapping of a rise in fuel duty and a reduction in corporation tax, this does not detract from the fact that £600bn – around £10,000 for every man, woman and child in the country – will be added to the debt over the course of this Parliament as a result of fiscal irresponsibility.

The Chancellor rightly alluded to a ‘decade of debt’, yet also said there are ‘no quick fixes’. Whilst this may be correct, that is not an excuse for the overwhelming failure of the government to implement radical structural reform.

The government has largely remained on track with regard to its public spending plans, but has effectively abandoned its fiscal rules by extending the timeframes for debt and deficit reduction. The Chancellor’s plans will add roughly £6,000 to the national debt for every person in the UK between 2013 and 2018, leaving national debt close to £65,000 per household by the latter.

This is unacceptable, and clearly signals the need for substantial structural reform as opposed to tinkering measures on the sidelines. Rebalancing Britain’s economy away from the public to the private sector is they key to long-term growth. The government should be pursuing supply-side measures such as a liberalisation of planning laws to ease the country’s housing crisis.

As people struggle with rising energy prices, the government could also tackle living costs by ending incoherent green policies. The impact of climate change policies will be to add around 26% to domestic electricity prices and 10% to domestic gas prices by 2015. This is simply not sustainable at a time when the cost of living is spiraling. It seems, however, that political expediency is trumping economic necessity.

Getting businesses growing should also be prioritised. A meaningful retreat from burdensome red tape is urgently needed to help businesses meet their potential. George Osborne should have announced swathes of exemptions from regulations for small and medium sized companies. The bonfire of red tape the Coalition has previously announced has amounted to very little actual change.

As a nation we also need to begin to live within our means. There are several measures which the Chancellor could have announced which would save substantial amounts of public money, such as the scrapping the unaffordable High Speed Rail 2 project – estimated to cost in excess of £10bn – and a freeze in international aid.

In terms of policy announcements included in the statement, George Osborne could and should have been bolder. Limiting benefit spending will provide a stronger incentive to work, although the Chancellor could have imposed a cash freeze on out-of-work benefits. These were uprated by over 5% last year, while wages struggled to grow by even 2%.

If the government is serious about ensuring that a life in work is more beneficial than a life on benefits, it makes little sense for welfare payments to rise. Whilst the 1% freeze is progress, the government could have gone further.

Another anomaly stemming from last week’s statement is the seemingly unfair ring-fencing of pensioners’ benefits. It is unclear as to why older people are being treated differently from younger people in the attempts to cut government spending.

Whilst attempts to reduce the benefits bill are laudable, the government will still be increasing pensions at a higher rate than inflation and wage increases. This will lead to ever-increasing spending commitments and leave less room for much needed tax cuts. At the very least, benefits should have frozen but ideally, the Chancellor should have announced an end to universal benefits such as winter fuel allowance.

It isn’t all bad news. The planned rise in fuel duty for the start of 2013 has not only been postponed, but cancelled. As the IEA argued in a recent paper, fuel duty is not only unfair on motorists, but also that it puts British companies at a competitive disadvantage and acts as a disincentive to work, pushing up the welfare bill.

Higher ISA limits will allow people to save tax free, a fair and progressive move, whilst the cut to corporation tax will be a significant boost for investment and the UK’s competitiveness.Ultimately though, the government need to face up their inability to tackle the deficit. The Chancellor should have set out a much more radical economic programme two years ago. It is famously difficult for government to get bolder as we reach the mid-term. Nevertheless, ‘Plan A’ has clearly failed, and our grim economic reality demands radical action. It is unfortunate that the government, despite its rhetoric, still do not seem to recognise this.

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