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Read my lips: George Osborne's tax pledge is bad economics Read my lips: George Osborne's tax pledge is bad economics
(2 months later)
Promising not to increase taxes if you win the next election, as George Osborne has done today, may or may not be good politics. But history suggests that it is undoubtedly terrible economics. The most famous example is probably George HW Bush's 1988 pledge "Read my lips: no new taxes". When he yielded to economic reality in 1990 and agreed to put up taxes, it was terminal for his credibility. It was also arguably the first step, after the gross irresponsibility of the Reagan years, back to fiscal sanity and the policies that gave the US both strong economic growth and eventually a budget surplus under President Clinton.Promising not to increase taxes if you win the next election, as George Osborne has done today, may or may not be good politics. But history suggests that it is undoubtedly terrible economics. The most famous example is probably George HW Bush's 1988 pledge "Read my lips: no new taxes". When he yielded to economic reality in 1990 and agreed to put up taxes, it was terminal for his credibility. It was also arguably the first step, after the gross irresponsibility of the Reagan years, back to fiscal sanity and the policies that gave the US both strong economic growth and eventually a budget surplus under President Clinton.
In the UK, Geoffrey Howe declared in 1979 "We have absolutely no intention of doubling VAT." In fact, his first budget only increased it by 87% (from 8% to 15%). Subsequent Conservative chancellors were more sensible; the Conservatives carefully avoided making promises not to increase taxes in both 1992 and 2010, and in both cases raised VAT sharply at the first opportunity.In the UK, Geoffrey Howe declared in 1979 "We have absolutely no intention of doubling VAT." In fact, his first budget only increased it by 87% (from 8% to 15%). Subsequent Conservative chancellors were more sensible; the Conservatives carefully avoided making promises not to increase taxes in both 1992 and 2010, and in both cases raised VAT sharply at the first opportunity.
So Osborne's statement that "tax rises are not required" after the next election is at best a hostage to fortune. But it is also neither credible nor responsible. The chancellor's argument is that "the further consolidation after 2015/16 is built into the tables as a spending reduction". This is entirely disingenuous; it may indeed be written in the tables, but it is not built in to the government's policies or programmes.So Osborne's statement that "tax rises are not required" after the next election is at best a hostage to fortune. But it is also neither credible nor responsible. The chancellor's argument is that "the further consolidation after 2015/16 is built into the tables as a spending reduction". This is entirely disingenuous; it may indeed be written in the tables, but it is not built in to the government's policies or programmes.
The tables show only an aggregate number – there has been no discussion at all of the specific cuts that would be required to deliver that number. This is what David Stockman, Ronald Reagan's budget director, described as a "magic asterisk". If the chancellor wants his claim that fiscal consolidation is indeed deliverable through spending reductions to be credible, he will need to set out in detail which programmes and benefits will be cut – health, pensions, education, disability or family benefits, defence, policing, or overseas aid (together, these categories make up the overwhelming majority of spending that is under the government's control).The tables show only an aggregate number – there has been no discussion at all of the specific cuts that would be required to deliver that number. This is what David Stockman, Ronald Reagan's budget director, described as a "magic asterisk". If the chancellor wants his claim that fiscal consolidation is indeed deliverable through spending reductions to be credible, he will need to set out in detail which programmes and benefits will be cut – health, pensions, education, disability or family benefits, defence, policing, or overseas aid (together, these categories make up the overwhelming majority of spending that is under the government's control).
But perhaps even less convincing than the chancellor's claim that he can deliver consolidation through spending cuts alone is his promise that he is going to stick to those plans in any case. Here we don't have to speculate – we can simply look at the record of the past three years. In 2010, the chancellor was planning to borrow £60bn this financial year; now he plans to borrow almost twice that. It's not just plans that have gone off track; the government's much vaunted "fiscal framework" gave a firm commitment to a reduction in debt as a proportion of GDP in 2015-16: that has now been ditched. So it's true that the government hasn't introduced any significant new, unplanned tax increases since the VAT hike; but only at the cost of abandoning its fiscal framework.But perhaps even less convincing than the chancellor's claim that he can deliver consolidation through spending cuts alone is his promise that he is going to stick to those plans in any case. Here we don't have to speculate – we can simply look at the record of the past three years. In 2010, the chancellor was planning to borrow £60bn this financial year; now he plans to borrow almost twice that. It's not just plans that have gone off track; the government's much vaunted "fiscal framework" gave a firm commitment to a reduction in debt as a proportion of GDP in 2015-16: that has now been ditched. So it's true that the government hasn't introduced any significant new, unplanned tax increases since the VAT hike; but only at the cost of abandoning its fiscal framework.
To be clear, in current circumstances, this was absolutely the right thing to do. Trying to chase the initial targets through extra spending cuts or tax increases would have simply made matters worse, as in much of the eurozone. The fact that things have turned out much worse than the chancellor expected in 2010 is partly a result of bad policy, here and abroad, but also to factors outside of his control – not to mention the fact that economic forecasts are inherently uncertain. But this just illustrates the foolishness of making firm commitments about tax and spending policy so far in the future.To be clear, in current circumstances, this was absolutely the right thing to do. Trying to chase the initial targets through extra spending cuts or tax increases would have simply made matters worse, as in much of the eurozone. The fact that things have turned out much worse than the chancellor expected in 2010 is partly a result of bad policy, here and abroad, but also to factors outside of his control – not to mention the fact that economic forecasts are inherently uncertain. But this just illustrates the foolishness of making firm commitments about tax and spending policy so far in the future.
We at the Nation Insitute of Economic and Social Research believe that in fact the Office of Budget Responsibility is overly pessimistic about the medium-term prospects for the economy, so that when recovery eventually becomes firmly established it may be stronger than that forecast, and the need for fiscal consolidation smaller, whether through tax increases or spending reductions. Let's hope we're right. But equally, there are significant long-term pressures on public expenditure that will require difficult decisions from future governments.We at the Nation Insitute of Economic and Social Research believe that in fact the Office of Budget Responsibility is overly pessimistic about the medium-term prospects for the economy, so that when recovery eventually becomes firmly established it may be stronger than that forecast, and the need for fiscal consolidation smaller, whether through tax increases or spending reductions. Let's hope we're right. But equally, there are significant long-term pressures on public expenditure that will require difficult decisions from future governments.
So, as the past few years have amply illustrated, there are lots of uncertainties; further fiscal consolidation is likely to be required in the next parliament, but both the magnitude and the timing are as yet unclear. Pretending that the government's current forecasts and plans are certain and reliable, when the ones made only three years ago turned out to be anything but, stretches credulity. And promising, on the basis of those forecasts and plans, to prioritise a pledge not to increase taxes over any commitment to responsible fiscal and economic policy, is precisely the wrong way to formulate a credible medium-term economic strategy.So, as the past few years have amply illustrated, there are lots of uncertainties; further fiscal consolidation is likely to be required in the next parliament, but both the magnitude and the timing are as yet unclear. Pretending that the government's current forecasts and plans are certain and reliable, when the ones made only three years ago turned out to be anything but, stretches credulity. And promising, on the basis of those forecasts and plans, to prioritise a pledge not to increase taxes over any commitment to responsible fiscal and economic policy, is precisely the wrong way to formulate a credible medium-term economic strategy.
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