Devil's in a lack of detail for Osborne and friends

The Lib-Con pact gives the new Chancellor carte blanche to rip up his party's manifesto – so how will he tackle the deficit now, asks Richard Northedge

On the wall of George Osborne's Westminster office is a cartoon of a former chancellor of the exchequer at his desk facing an in-tray overflowing with papers on the world recession, unemployment and the economy. The chancellor depicted is his 1970s Labour predecessor Denis Healey, but Osborne thinks he has inherited the same tray of pending problems.

He has promised a Budget within 50 days of taking office to outline his solutions. In theory his party's manifesto, produced only a month ago, tells us what to expect, but in practice the pact with the Liberal Democrats has given Osborne carte blanche to rip up his published plans. The coalition agreement negotiated by the two parties last week sets out a new set of proposals without giving details, but what it fails to mention is as important as the hints it gives.

There is no mention of the Tories' pledge of a permanent exemption from stamp duty for first-time buyers of homes costing under £250,000, for instance, or of any crackdown on non-doms.

The Liberals' proposals for limiting tax relief on pension contributions or a "mansion tax" are absent too, along with their plans for business rates and the Conservatives' promised reform of corporation tax.

But the biggest omission in the 3,000-word coalition agreement – just as it was the undebated subject of the election campaign – is VAT. Everyone from economists to retailers seems resigned to an increase but no politician will discuss it. Raising the rate from 17.5 to 20 per cent would give the Government about £10bn a year – and hit consumption by the same sum – and a 22 per cent rate would add as much again, taking VAT receipts to £100bn.

Yet useful as £10bn or £20bn would be, it makes only a minor dent in the public finance deficit – and the Con-Lib agreement to block Labour's announced national insurance increase on employers leaves another £2.5bn to find. The deficit in the year ending last month was £167bn and Alistair Darling's March Budget planned to cut that only to £163bn this year. Even by 2014-15, Darling was reducing the deficit only to £74bn with a surplus – last achieved in 2001 – nowhere in sight but public debt almost doubling over the period to £1,406bn.

And it is feasible the new Office for Budget Responsibility, headed by Sir Alan Budd, who was head of the government economic service under John Major's government, could revise those figures upward.

Osborne must take tough action to close that deficit but the Con-Lib agreement devotes more space to detailing additional expenditure and tax reductions than discussing spending cuts and revenue raising. The Lib Dems' proposal to exempt the first £10,000 of everyone's income from tax would have cost £17bn: last week's joint agreement now talks of focusing on low and middle earners, which suggests the new Chancellor may instead narrow the basic-rate tax band without helping the higher-paid.

The Tories' plan to raise inheritance tax limits are on ice while the Lib Dems remain free to oppose reliefs for married couples. But both parties' campaigns concentrated on spending cuts rather than tax rises and that remains their policy – whether the 20 per cent from tax, as the Tories wanted, or the Lib Dems' 30 per cent proposal.

The Conservatives are sticking to their controversial plan for £6bn of immediate spending cuts, even though that shrinks the deficit only modestly. The Bank of England's forecast last week of higher growth may encourage the Chancellor to conclude that the economy can absorb bigger cuts. Robert Chote, director of the independent Institute for Fiscal studies, says: "This will give the coalition parties useful cover against accusations that they are taking undue risks with the recovery".

But Osborne proposes raising health spending in line with inflation, if not at the NHS's high level of price rises, and lifting overseas aid even more while state retirement pensions will increase with the higher of earnings, prices or 2.5 per cent.

"This suggests an intense squeeze on the budgets of other Whitehall departments in the spending review due this autumn," says Chote. "It also leaves open the option of tougher action to cut social security spending and does not rule out the possibility of significant net tax increases."

Capital spending is already being halved over four years from £50bn under Darling's plan, but Osborne is limited on making cuts in the current financial year until he sees the results of the spending review. Britain is this year spending £40bn on defence – which will be separately reviewed, though the Tories have defied the Lib Dems' demand to axe Trident, £89bn on education, £122bn on health and £196bn on pensions and benefits: making cuts will be painful.

Next month's Budget can cut civil service jobs but will not follow Greece, Spain and Ireland in cutting their pay. What's more, even when the new commission on public-sector pensions reports, accrued benefits will not be reduced. And Osborne thought Denis Healey had a full in-tray?

Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little