What to do if you can’t tax or borrow out of trouble

Today one Finance Minister in the British Isles cut spending, cut borrowing by 1 per cent of GDP compared to his last Budget and cut the national debt by 5 per cent.  It wasn’t Alistair Darling.

Brian Lenihan cut Irish public spending by 7 per cent (equivalent to a £40 billion cut in the UK).  He cut the public sector headcount, pay, pensions for new entrants and unemployment and child benefits.

Alistair Darling postponed the inevitable reckoning on the finances until the pre-election Budget, the post-election Budget or a currency or debt crisis if that comes first.  Brian Lenihan gave us the flavour of what that reckoning will be and how it will be argued.  

His arguments against further borrowing and taxes and in favour of spending cuts stand repeating:

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“Some have argued we should continue to borrow and wait for the economy to grow again before tackling the budget deficit. There are three reasons why this is not a viable proposition.

First, we know from the 1980s how large deficits, left unchecked, can lead to a dangerous spiral of mounting debt and ever increasing interest payments. Never again should we return to a position where all of our income taxes go to pay interest on the national debt. Second, international debt markets have become more crowded and more fragile. If lenders were to lose faith in our ability to restore order to the public finances, the consequences for our economic wellbeing would be profound. Third, only decisive action will restore confidence. Consumers will only start to spend and business owners will only invest and create jobs if they believe we are tackling our deficit problem now.

In our everyday lives we do not borrow to pay for our household bills. We cut back and seek to live within our means.  The same strictures apply at national level.  Borrowing hundreds of millions a week to pay for day to day spending is just not on.  Stabilising the deficit is the next key milestone in our plan to deliver economic recovery for this country.

Others have argued for increases in taxes as a means of stabilising the deficit.  But those who demand higher taxes fail to recognise what I have already done ….  But we have reached the limit. We will not create jobs by increasing the penalty on work and investment.

  So if we cannot tax our way out of our difficulties and we all agree in this House that we cannot borrow our way to recovery then the only remaining option is to reduce our spending.  No one wants to cut spending but the cost of providing public services has to be reduced to bring it in line with sustainable revenue levels and to help restore our international competitiveness.”  Andrew Haldenby is director of Reform