A long time ago in an economy far, far away, a Great Leader with a reputation as an Iron Chancellor had a Golden Rule. It said that the government should balance its books, borrowing prudently when needed and paying it back in the good times. But then, in September 2008, Lehman Brothers went bust. The economy shrank; tax revenues dried up; banks were nationalised. Rather suddenly, government borrowing was forecast to go up from about 2.5 per cent of national income to 12.5 per cent – a level that would be regarded in peacetime as disastrous, as Jon Moulton points out.
But Nobel prize-winning economists such as Paul Krugman said governments ought to go on borrowing and spending, to avert a depression. So Labour cut VAT for a year and put off tax rises and spending cuts until after the election, apart from a tax on bankers' bonuses and the 50p rate of tax on incomes over £150,000, which came in this month. Labour promises to halve government borrowing (the annual "deficit") over four years, with about two-thirds achieved by spending cuts and one-third by tax rises. The Conservatives said that cutting the deficit was more urgent, promising to start sooner – this financial year – and with more of the strain taken by spending cuts.
So the first reaction to the Tory promise to cancel £6bn of the planned rise in National Insurance contributions next year was that it contradicted their warnings about the dire state of the public finances. Especially as it is supposed to be funded by £12bn of efficiency savings – the unconvincing recourse of failed Tory opposition leaders past, viz William Hague, Iain Duncan Smith and Michael Howard. The second reaction was that it was a masterstroke that got the Tories out of proposing unpopular medicine that was losing them votes.Reuse content