25 Mar 2010

Election battleground boils down to bulk

The word bulk is now key to the election economics. It is the root of what difference exists between Labour and Conservatives in terms of their spending cuts and tax rises.

George Osborne has for months been backing the governor of the Bank of England’s suggestion that the “bulk of the structural deficit” (the underlying deficit that’s not related to the state of the economy or investment spending) should be eliminated in the next parliament.

Yesterday the less-bad-than-expected deficit numbers meant that Alistair Darling claimed he was doing exactly this.

The structural deficit is indeed being cut from 8.4 per cent of GDP to 2.5 per cent of GDP in 2015. If bulk means “significantly more than half”, then the chancellor appears from these numbers to believe that it means 70 per cent.

So if the Conservatives want to do more, and they define bulk as, say, 80 per cent, then they will need to identify roughly £12bn extra in cuts or tax rises.

In the IFS‘s heroic Budget analysis – the document George Osborne was saying he was “waiting for” before coming up with his numbers – they put this another way.

They say that to eliminate the structural deficit by the end of the forecast period assumed to be 2015-16, the Tories will have to cut an extra £8bn from spending or raise it in taxes, beyond Labour’s plans.

Interestingly this is less than the assumed difference between the parties at the time of the Pre-Budget Report – then £15bn.

So the less awful public finances, and the fact the chancellor did not spend that money from lower than expected benefits, has done half the Tory job.

The IFS has calculated that the “hole” in the public finances is £7bn smaller post-budget, and that yesterday’s statement “passes test” of “do no harm”.

So can the Tories really maintain the position that only their programme can save the country from ruin? Is an £8bn difference going to be the difference between fiscal prudence and “Greek-style interest rates”.

Of course, this works both ways.

The difference is so modest because somewhere in the treasury, civil servants are already planning totally savage cuts to government budgets, that are implied from yesterday’s numbers, but which Labour don’t want to talk about before the election.

After taking into account rising benefits and debt interest payments, the IFS calculate that implied cuts in “unprotected” areas like housing transport, universities, defence will be 14 per cent over two years from 2011.

If the protection of frontline schools and hospitals continue, you are looking at a whopping 25 per cent cut to those areas in the next parliament.

That scores high on any ‘denialometer’, but the Opposition have to explain basically the same thing and then some £8bn extra, and then even more if they want to reverse tax hikes like the national insurance increase.

The constructive vagueness of both parties is wearing a bit thin.

But the Opposition can not on the one hand claim that Labour’s plans mean “ruin”, yet see that the best independent analysis of their plans (which the shadow chancellor said he was waiting for) suggests that the election equation is Conservatives equals: ruin minus £8bn.

It’s getting time for George Osborne to show some of his hand.