The longer he waits – the more painful

By Ed Balls MP

“The weak thing to do is just to keep ploughing on and say ‘I can’t possibly change because I might have a difficult time at a press conference’. The tough, strong thing to do is say ‘yes, we can make these plans better’.”

That’s what David Cameron said yesterday to explain his u-turns on sentencing policy and the NHS. But the Conservative-led government does not yet seem willing to apply this principle to the economy – insisting that any change of course would be disastrous, even when the evidence is growing that their plan isn’t working.

It was announced a year ago today in George Osborne’s first Budget. At its heart was a political choice to tear up our balanced plan to halve the deficit over four years and, instead, decide to cut it further and faster than any other major economy in the world. As George Osborne himself boasted at the time, this would mean an extra £40 billion of spending cuts and tax rises, including a big rise in VAT.

And in an Opposition Day Debate I have called in Parliament today Labour will focus on what’s happened to economic growth, confidence, jobs and living standards in the twelve months since that first Budget.

Rather than sending his Lib Dem deputy to cover for him, as he did last time, I hope the Chancellor will come to the House of Commons today and explain the consequences of his decisions a year ago.

Of course after the global financial crisis – caused by the irresponsible actions of the banks – every major country has a big challenge to get their deficit down. But the debate is about how far and how fast and the short-term impact, whether it works for the long-term and whether it is fair.

First, on the speed and scale of deficit reduction, the Osborne plan has clear goals, but they are driven by a political timetable and a political strategy – to eliminate the structural deficit by 2015-16, get the pain in early in the hope that Labour takes most of the blame with the Lib Dems as human shields taking the rest, and hope the gamble pays off and George Osborne can afford pre-election tax cuts to try and persuade voters the pain was worthwhile.

But, as I said in my speech at the LSE last week, the question is whether it will work. It is too early to make a definitive judgement, but a year on the evidence is not encouraging.

Twelve months on the economic recovery has been choked off with zero growth over the last six months while other countries race ahead, the VAT rise has helped to push up inflation to more than double the government’s target rate, consumer confidence has fallen and manufacturing output and retail sales both fell last month.

There has been a welcome fall in unemployment in the last two months, but the claimant count is rising, vacancies are down, job creation has slowed down in the six months since the spending review, and unemployment is set to be up to 200,000 higher over the coming years than expected just a few months ago.

And by trying to cut the deficit too far and too fast the government now seems to be creating a vicious circle in our economy. The Treasury is now set to borrow £46 billion more than they had planned last autumn because of the slower growth, higher inflation and higher unemployment their policies have delivered. And as new figures showed this week, even though deep cuts and tax rises have now kicked in, the government has borrowed more in the first two months of this year than last year.

Second, on whether it works for the long-term, the test for the economy is not whether we avoid a double-dip recession, or whether unemployment rises or falls in any particular quarter, but how much pain is inflicted along the way in lost growth and lost jobs.

While the American, German and French economies have already recovered to their pre-crisis levels of output, we in Britain are still 4% below that level. And compared to the Office for Budget Responsibility’s forecast before the Budget last June, their latest forecasts imply that by the end of next year we will be £5.6bn worse off as a country.

The cost of that slower growth is equivalent to a loss of income of over £300 for every family. And if UK growth came in 0.5 percentage points below trend in every year of this parliament, our country would be £58bn worse off in 2015 – that’s £3,300 for every family.

And finally, on fairness, George Osborne’s claim that “we are all in this together” is becoming laughable. The banks are getting a tax cut this year while his first Budget’s measures hit women three times harder than men. As for his claims last year that he was delivering a “progressive Budget” and child poverty would not rise, the Institute for Fiscal Studies was clear that the measures were “regressive overall” and that child poverty will rise this year, next year and the year after.

George Osborne brushes all this aside and insists there is no alternative. But as Norman Lamont found with the disastrous ERM policy 20 years ago, it’s easy to get boxed in to a policy that isn’t working. Increasingly tough talk about ‘sticking to the course’ and insisting ‘there is no alternative’ will not change the reality.

I believe it is now time for the Conservative-led government to adopt a more balanced deficit plan which, alongside tough decisions on tax and spending cuts, puts jobs first and will be a better way to get the deficit down over the longer term and avoid long-term damage to the economy.

But even if the government will not change course and agree to halve the deficit over four years, they could take a step in the right direction and do two things to help get the economy moving again and so help the deficit in the long-term.

George Osborne should temporarily cut VAT to 17.5 per cent until the economy returns to strong growth and, instead of giving the banks a tax cut this year, use funds raised from repeating last year’s bank bonus tax to build 25,000 affordable homes and create 100,000 jobs for young people.

Getting the economy moving again and people off the dole and into work is, alongside tough decisions on spending and tax, the best way to get the deficit down over the longer-term and avoid long-term damage to the economy.

It is not too late for George Osborne to change course. On the economy, the tough, cautious and prudent thing is to act before it is too late. But the longer he waits the more painful I fear it will be.