Reform: Pre-Budget Report set to prolong the recession

Press release from the independent, non-party think tank Reform:

A fiscal stimulus package would prolong the recession and damage the economy, according to a new report by the independent think tank Reform. The academic evidence – and the true finding of John Maynard Keynes – is that governments should restore confidence rather than unbalance the public finances further. The Chancellor needs to set a direction towards a high-saving, low tax, high productivity economy.

The Prime Minister and the Chancellor have said that the public finances can withstand a burst of extra borrowing. In fact the UK has the fourth highest structural budget deficit in the OECD. Including the Government’s long term spending commitments on pensions and education, the deficit stands at 6.6 per cent of GDP. Without changes in spending, that means eventual tax rises of £100 billion, or £4,000 per household, which would wipe out over a quarter of families’ disposable income.

The Treasury’s estimates on borrowing are not trustworthy. In the last five years, it has underestimated the true level of borrowing by a total of £121 billion.

The Chancellor has said that any increase in borrowing will be temporary because tax rises will follow at the right time. But a leading authority has said that political promises of this kind are not credible. The Chancellor risks long term damage to confidence by unbalancing the public finances. He is following “Toxic Keynesianism”.

Instead the Chancellor should get a grip of public spending. That does not mean crisis cuts in public spending, which would increase inefficiency and – by creating a perception of under-funding – lead to demands for higher spending later on. Instead it means the programme of public service reform that the Government should have introduced years ago. The recession should give the Government the courage to tackle the root causes of inefficiency, notably workforce agreements and political direction. The Chancellor can also set out a productivity agenda for the private sector and individuals.

Continue reading this article HERE.