Austerity until 2020, so says David Cameron today. It is not at all clear though what he means by this.
The government needs to work harder on eliminating the deficit. Their timeframe for getting rid of it has already slipped from a target of 2015, until 2017. Surely Cameron is not now suggesting they won't manage it until 2020?
Public spending is around 47% of GDP and the deficit this year alone is forecast to be around £92bn. With a national debt already over £1 trillion, by the end of this Parliament it will be around £1.5 trillion. The government has increased taxes to try and begin to close the deficit and has also made minor spending reductions - but the size of these has been woefully inadequate.
Running a deficit is the root of many of our problems. It adds to the national debt, driving up interest payments and stifling growth. It is a vicious circle where poor growth exacerbates the deficit, and having a deficit makes prospects for growth tougher.
The key to closing the deficit lies in reducing the size of the state through proper reform of its functions. In turn this will give the government space to make tax cuts which will stimulate growth. We have ended up with such an unyielding deficit because government spending has grown to such a huge proportion of our economy it has squeezed out private enterprise and reduced incentives within the private sector.
Cameron must be more ambitious if he is to cut the state down to size. We need to remember when Tony Blair took office, spending was around 38% of GDP. Under New Labour the scope of the state dramatically increased, for example with more and more people brought into dependency on welfare.
We can't wait until 2020 to close the deficit; we need to act on that now. But perhaps it would be a useful target to aim at trying to reduce the size of the state to 30% of GDP by then. The next spending review could be an opportunity to set out a plan for what this might look like. It would require a thorough, honest and imaginative assessment of government. And the political courage to see it implemented in the face of opposition from many special interest groups that currently benefit from favours doled out by government.
We talk of austerity as if it were severe, a punishment imposed on us for past recklessness. It is though about opportunity and freedom. Allowing people to keep more of their own money, have more of a say over their own lives, being more innovative in how we access decent healthcare, education and other services will drive up standards. A smaller state will mean more jobs, more houses and a better quality of life.
Forget 2020, Cameron needs to act now.
Ruth Porter, Communications Director, Institute of Economic Affairs
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