There is a perception in some quarters that, while the public feel the pain from higher fuel and food prices, the Government is not faring too badly. Does the Treasury not benefit from higher fuel tax when petrol and diesel is expensive? Do the profits from valuable North Sea oil not bolster the public finances?
It is true that the Treasury has benefited from fuel taxes of late. But, as a new report from the National Institute of Economic and Social Research (NIESR) shows, this is more than offset by other shortfalls in tax income. Stamp duty revenues are declining as the housing market stagnates. And less economic activity means that a decline in VAT and corporation tax receipts is inevitable. The truth is that the Government is feeling the squeeze just as keenly as the people of Britain.
The upshot is that the deficit in the public finances, according to the NIESR, will be £7.5bn larger than the Treasury expected. The Government will need to raise this figure in new revenues if it is to stick to its "golden rule" of balancing spending and borrowing over the course of the economic cycle.
So is the Government the architect of its own misery? Or can the Prime Minister reasonably blame dire global economic conditions? The rhetorical line of attack from the Conservatives on this issue – that Mr Brown should have fixed the roof when the sun was shining – has some substance. As Chancellor, Mr Brown was relatively well prepared to weather the global economic downturn of 2000. It is true that luck played its part eight years ago. Low inflation mean that the Bank of England could afford to cut interest rates, which helped stimulate economic activity. But an injection of public sector spending from Mr Brown was also crucial in keeping the economy moving.
He was in a position to provide this stimulus because he had built up a fiscal surplus over the previous three years. Now the public finances are in the red thanks to five years of lavish government spending. This time round, no leeway exists for Mr Brown's successor, Alistair Darling, to increase spending into the downturn. Like the British public, the Government "maxed out" the credit card in the good times and is now struggling to keep up with the repayments.
What can the Government do about this hole in the public finances? Mr Brown and Mr Darling face some unpalatable choices. They could ease the Treasury's self-imposed borrowing restrictions. But this will shatter, for good, the Government's economic credibility. Another option is to raise taxes to plug the hole. After the 10p tax debacle, Mr Brown will be understandably resistant to pursuing such a course. And, in any case, raising taxes would suck spending power out of the economy, something likely to make the downturn worse. The Government can squeeze the public sector wages bill, but this will only keep its debt problem from getting worse, not reduce it.
Finally, there is that old standby for politicians desperate to make their sums add up: efficiency savings in the civil service. As the downturn progresses, expect to hear pledges from the Treasury about how fat will progressively be cut from the state. The problem is that the Government has been running such a savings programme for several years, but there has been precious little sign of it making a difference to the bottom line. It was hard enough to squeeze efficiencies from the public sector in the boom times. Few expect it to be any easier now that we are entering a downturn ofuncertain duration.
There will, in fact, be no quick fix for this problem. As anyone who has ever been in debt will know, the only way out is slow and painful repayment.Reuse content