Mervyn King is not known for his hyperbole, so we should take comfort from his assertion this week that the new government’s deficit reduction plan is ‘strong and powerful’.
The governor of the Bank of England warmly praised the Conservative–Liberal Democrat coalition’s determination to revive the public finances. King was clearly impressed that ‘deficit reduction’ was number one in Messrs Cameron and Clegg’s list of 11 priorities.
It certainly needs to be. With a deficit last year of £163bn and a similar amount forecast for this year, the outlook is grim.
It might not be entirely fair to blame the outgoing government for the global financial crisis. But Cameron was not overstating things when he said that ‘no government in modern times has ever been left with such a terrible economic inheritance’.
The response will be rapid. We are promised an emergency Budget within 50 days and a Spending Review in the autumn. We’ll even get another inquiry into local government finance to add to the many that have been commissioned (and ignored) before.
There are still plenty of questions to be answered, however, about where the cuts will be made. This is especially true given the blue-yellow coalition’s emphasis on reduced spending, rather than tax hikes, and its commitment to real-terms health increases.
And, of course, there are additional spending promises to be funded. Not least of these is the £17bn required for the ‘longer-term policy objective’ of raising the income tax threshold to £10,000.
We don’t have to look far to see what might be in store for the UK. The problems in Greece have been well documented, but Spain has just announced a 5% cut to public sector salaries, as well as reductions to pensions and regional government funding.
Meanwhile, across the Irish Sea, the government of Brian Cowen has battled with these issues for some time. As our cover feature shows (see pages 14–17), Ireland has cut public sector pay by 5%–15%, introduced a pension levy, axed welfare payments and promised a bonfire of the quangos.
If the UK went the way of Greece, Spain and Ireland, what would be the implications for the Tory–LibDem alliance?
The prime minister and deputy prime minister might, on this occasion, prefer not to be reminded of an earlier comment by the Bank of England governor.
According to King, the austerity measures required could mean the election winners find themselves out of power for a generation.
Mike Thatcher, editor Public Finance
