Friday, 16 April 2010

The Elephant In The Room Makes It A Grim But Simple Choice

The electoral "elephant in the room" is exactly how the next UK government will eliminate the country's £90bn structural deficit - the core part of the £167bn in overall public borrowing we can't pay off in the usual ebb and flow of the public finances.

Everyone is rightly speculating about the likely mix of higher taxes, spending cuts and the role economic growth will play if each political party were elected. But the detail will change and is ultimately a distraction for election purposes. The short answer lies in the basic party philosophies.

In essence, Labour believes the public sector is the economy, and the private sector - including individual taxpayers - is there to support the public sector economy for the common good. That's why they keep saying that tax cuts (i.e. lower public income) and reduced public spending would 'take money out of the economy'. Therefore, Labour's primary goal is to suck an extra £90bn out of the private sector into the public sector in the coming years, over and above 'normal' levels of taxation. Job done. Curing public sector waste and inefficiency are secondary, and not even necessarily 'nice to have', particularly for the unions who've contributed substantial sums to the Labour party.

By contrast, the Tories/LibDems believe the economy comprises both the public and private sectors. Which is why they keep saying that avoiding a rise in National Insurance will boost economic growth by leaving money with individual people who'll spend it to greater effect - more quickly and on local goods and services - than wasteful government departments who spend vast sums on overhead but ultimately produce nothing. So, while the Tories/LibDems would also need to hike taxes to some extent, they would primarily focus on reducing public sector waste and inefficiency to minimise the amount of money that has to be diverted from productive private sector activity into the public sector. Where those two parties differ is that the Lib Dems want the public sector to do much more than the Tories do, which is why the Lib Dems are always coming up with random additional taxes to pay for it all.

However, life is what happens while you're making plans. Labour's immediate problem is that the private sector is already stretched thin, conserving cash to repay private debt and rebuild savings in light of concern for the future. That's why they talk about delaying plans for the National Insurance hike (and no doubt other increases) until the economy's had a chance to recover, while the Tories/LibDems talk about reducing public sector waste and inefficiency now, to avoid the need for Labour's planned NI increase and minimise future tax rises.

So it's a straight choice, but a grim one. Higher taxes in the coming years and little change in the public sector under Labour. Public sector reform with a bit more cash in your pocket under the Tories, and somewhere in between under the Lib Dems.

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