Given thge crisis, I thought the response of the government was reasonably bold. A real disaster was averted, though I can understand why you don't get much credit for a situation with 2.5million unemployed and the current state of the government finances.
Anyway looking to the future, these are a few of things I would like to see from a new government.
Stable Growth. We have just escaped from the longest recession on record. It has left a painful legacy - a rise in borrowing, a rise in unemployment, spare capacity in economy. Stable positive growth, is essential for stabilising government borrowing and bringing down unemployment. (importance of growth)
Annual borrowing of over 12% of GDP, is clearly completely unsustainable during peace time. Part of the problem is due to cyclical factors and the financial bailout. But, there is also a medium term structural deficit which needs to be tackled. It is no easy task and a few penny pinching ideas here and there are not going to be enough.
Deficit Reduction should not be so severe, the deflationary impact pushes economy back into recession. On the one hand we need to reassure markets, but, we have to maintain a flexibility depending on state of economic recovery. We need to avoid the hysterical over-reaction of a panic spending cuts. Fortunately,
- Monetary policy can remain loose.
- The Weakness of the Pound should increasingly help our exports.
- The Bank of England's own growth forecasts are cautiously optimistic.
- Forecast growth of 3% does give us good room for manoeuvre.
Where to Cut?
It would be a mistake to ringfence a particular budget like the NHS. What is sacrosanct about the rising number of NHS bureaucrats?
Welfare State is the biggest burden for government spending. With an ageing population, moves to increase retirement age are essential to promote long term
Benefits Trap. There is still an element of poverty trap, which helps explain the huge social security budget.
The temptation is to cut 'easy' targets like transport, defence and local authorities. I don't mind scrapping trident. But, if we cut spending on transport, we could damage the long term productive potential of economy, and it would be self-defeating.
Taxes To Increase
Pareto Taxes. As an economist, we want government to make a greater effort to tax goods with negative externalities. Tax unhealthy food to finance spending on NHS and encourage healthier lifestyles. Tax carbon emissions. It is possible to raise revenue, and increase economic efficiency. New taxes are never popular, but, if explained, maybe people will see it is the least bad alternative.