A post-election world of pain beckons

The election in many ways is a lie.

What Greece ‘s £94bn bailout is showing, and the reported views of the Bank of England governor too, is that Britain over the next two to three years will not resemble the picture of the country that was sold to you in this campaign.

It is a matter of mandate. The Conservatives made a lot of the mandate argument in the autumn. The austerity message continued until it was roundly dumped after the budget in favour of sunshine, optimism, and stopping the so-called “jobs tax”.

In the likely absence of a straight Labour victory, it seems very likely that we will get an “emergency budget” in the Summer, whatever the result or coalition. Look at Portugal  last week, where the equivalent of Brown and Cameron emerged for the cameras together to announce extra austerity.

Now, of course we are not Greece. But even on any measure of historical austerity – say 1993 – it is instructive that we saw huge expansions in VAT, and national insurance, and restrictions of income tax allowances, and 10p on petrol, booze duty up, not to mention savage spending cuts. The fiscal repair job from 1993 was 5.5 per cent of GDP. Now it needs to be 8.4 per cent – i.e. the same as 1993 and then half as much again. 

Let’s make that clear again. If there was a unit of scale to measure tax and spending pain, a kind of fiscal Richter scale, then say 1993-1999 was a “nightmare”, then 2010-2016 would rank as one and a half  “nightmares”.

Greece is enduring two nightmares  over five years. The fiscal repair job in Greece will move its structural deficit from 12 per cent of national income to about 2 per cent – a repair job of around 10 percentage points. In practice that means VAT set to be hiked to 23 per cent alongside what might amount to a 17 per cent public sector pay cuts  (if Greeks no longer receive 2 months bonus pay), and a total freeze in pensions under the difficult IMF/EU negotiations in Athens.

So for context, what is going to be inflicted upon Britain by the Conservatives from this year, or Labour/LibDems from April 2011, will be somewhere between the pain from the early 1990s and the future pain in Greece. All parties feel that the vast majority (80 per cent for the Tories to 66 per cent  for Labour) of the job could be done by spending cuts rather than tax rises. History suggests that this is rather hopeful.

The Labour campaign has attacked most types of spending cut. The Tory campaign abandoned fiscal hawkery for the lozenge of lower taxes. The LibDem “saints” launched a poster attacking the supposed ‘Tory VAT bombshell’ knowing full well that it could not rule out a VAT rise itself.

Remember the obfuscation , in a couple of months time, when the alleged shock of the black hole in the public finances is thrust upon Britain.