Deficit Reduction

Deficit reduction is the glue that binds the Coalition together.  The coalition agreement itself highlights that “the most urgent task facing this country is to tackle our record debts”.  Cameron and Clegg have repeatedly cited reducing the deficit as the core focus of the coalition, and it is fair to say that the legacy they leave will largely be determined by the progress made in this area.

With the political stakes so high, the Government is understandably keen to avoid the perception that it is failing. It is therefore perhaps unsurprising that the pledges within the Coalition Agreement are vague to the extent that any limited achievement could be considered an overall success.  For instance, the pledge to “recognise that deficit reduction, and continuing to ensure economic recovery, is the most urgent issue facing Britain” is not the most difficult economic challenge the Government faces.  Similarly, commitments to “reduce the number and cost of quangos” mean that any reduction could be considered to have met the aims of the Coalition Agreement. This is perhaps why the Government has scored so highly in this assessment, when at a macro level they have been forced to delay their deficit timetable, extending the process into 2016/2017.

In delivering their pledges, the Coalition has had some early achievements: scrapping the planned ‘jobs tax’, making reductions to the child trust fund and tax credits for higher earners. Similarly, in a move to ensure that economic forecasting is more independent, the Government established the Office of Budget Responsibility (OBR) in May 2010.

Despite these initial successes, fulfilling some of the pledges may prove to be more difficult.  With the lack of growth in the UK economy, the aim of accelerating the reduction of the structural deficit across the course of the Parliament maybe a more difficult challenge than was initially realised.  If growth and tax receipts do not improve, then the Government may be forced to make additional cuts in order to meet their aims.  If this scenario occurs, then other pledges such as “protecting the low paid” may become increasingly difficult to deliver.

The importance of deficit reduction to the future of the Coalition is reflected in the fact that the Government has scored strongly on delivering these pledges. However a large part of this can be attributed to the vague nature of the commitments they have pledged to keep.  For the Government, success in reducing the deficit without jeopardising growth may prove harder than meeting their commitments within the Coalition review.

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Progress against the Coalition Agreement

Deficit Reduction     7 / 10 = 70% Done

Pledge: We recognise that deficit reduction, and continuing to ensure economic recovery, is the most urgent issue facing Britain.

Status: Done – The Government has repeatedly affirmed its political commitment to deficit reduction.

Pledge: We will significantly accelerate the reduction of the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes.

Status: In progress – The midterm review states that the Government has reduced the deficit by a quarter in just two years and more recent figures state that the deficit has been cut by a third.  In his Autumn Statement the Chancellor described how ‘It [the deficit] is falling and it will continue to fall each and every year.  To 6.1 per cent next year, 5.2 per cent the year after, 4.2 per cent in 2015-16 then 2.6 per cent, before reaching 1.6 per cent in 2017-18.’  In the Autumn Statement, the Chancellor revealed that the OBR still believed that the Government was on target to meet its fiscal mandate.   The Government is also keen to highlight that the structural deficit has fallen by 3 percent of GDP, the sharpest fall in the G7.

However, the Government has already delayed its deficit reduction timetable, and with the cuts continuing into 2016/17 and the slow rate of economic growth, reducing the structural deficit has proved to be harder than expected.

 

Pledge: We will introduce arrangements that will protect those on low incomes from the effect of public sector pay constraint and other spending constraints.

Status: In progress – Public sector staff earning less than £21,000 were exempt from the Government’s freeze on public sector pay. Those earning under £15,000 are also exempt from the increases in public sector pension contributions that began on 1 April 2012.

However the pledge to protect people on low incomes from “other spending restraints” is more controversial. Whilst the Government is keen to highlight that from April 6th 2013, 24 million people will be paying £600 less income tax than in 2010, the Labour Party argues that changes to tax credits, benefit cuts and spending decreases have meant that families are £1,800 worse off.

Pledge: We will protect jobs by stopping the proposed jobs tax.

Status: Done – The ‘jobs tax’, as proposed by the then Chancellor Alistair Darling in 2010, put 1p on the cost of National Insurance.  This coalition chose to cancel this increase and, at the 2013 budget, made a further £2,000 reduction in national insurance for all businesses.

Pledge: We will set out a plan for deficit reduction in an emergency budget. We have created an independent Office for Budget Responsibility to make new forecasts of growth and borrowing for this emergency budget.

Status: Done – The Office for Budget Responsibility was created in May 2010 and George Osborne held his emergency budget on 22nd June 2010.

Pledge - We will make modest cuts of £6 billion to non-front-line services within the financial year 2010/11, subject to advice from the Treasury and the Bank of England on their feasibility and advisability. A proportion of these savings can be used to support jobs.

Status: Done – £6.2 billion of cuts were made in the financial year 2010/11, however £500 million of these savings were used to reinvest into education, apprenticeships and social housing.

Pledge: We will hold a full Spending Review reporting this autumn, following a fully consultative process involving all tiers of government and the private sector.

Status: Done – The Government held a full spending review in October 2010, having conducted the spending challenge which engaged academics, business and members of the public.

Pledge: We will reduce spending on the Child Trust Fund and tax credits for higher earners.

Status: Done – Babies born on the weekend of the 3rd August 2010 were the last to receive the full £250 voucher (or £500 if the household income was less than £16,190) paid into a child trust fund.

The government also announced changes to tax credits which meant that families with one child lost eligibility for tax credits at an income of £26,000, which it is hoped will save £3.2 billion in 2013, £3.6 billion in 2013/14, £3.9 billion in 2014/15 and £4 billion in 2015/16 and 2016/17.

Pledge: We will create strong financial discipline at all levels of government and place an obligation on public servants to manage taxpayers’ money wisely.

Status: In progress – HM Treasury’s Managing taxpayers’ money wisely strategy document, published in January 2011, outlined the Government’s commitment to public sector financial discipline, and stated that all departments will be required to report on their financial management improvement plans. Progress in ensuring that strong financial discipline is introduced is ongoing.

Pledge: We will reduce the number and cost of quangos.

Status: Done – A Cabinet Office report released in December 2012 found that the Government is half way through its target of reducing the administrative cost of non-departmental public bodies by a minimum of £2.6 billion by 2015.

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