IFS budget: don’t cut now, but cut larger, later

One economics buff colleague of mine suggested a few years back that the country be run by a committee of benevolent economists with the then head of the Institute for Fiscal Studies, Andrew Dilnot, somewhere high up in Cabinet.

I pondered this while the IFS revealed perhaps the most important non-party document of the pre-election period. Its Green Budget, released today, is thicker than the actual budget document, and an invaluable guide through the maze of public finance posturing.

My view of it is that it is beginning to expose the almost irrelevant differences in economics that underlie the current fierce public spending politicking.

The “debate” is about tax and spend in the period starting this April (2010/11) to 2015/16. The tax increases and spending curbs announced over the last three Budget statements imply a fiscal tightening of 4.1 per cent, or £57bn in today’s terms.

The IFS thinks that £13bn more of additional tax increases or spending cuts would be sensible in this timeframe to defuse the debt danger. Remember with elements of health and schools already “protected” and debt interest payments and benefits surging, some departments are already facing savage 17 per cent cuts.

So where would the additional money come from? The spectre of fundamentally higher taxes and/or acute benefit or tax credit cuts looms large in this analysis.

The IFS take so far seems fundamentally supportive of the Conservative promise to cut faster than Mr Darling’s legally enshrined plan to halve the deficit over the next parliament. But the IFS also undermines the recent Conservative debate on when to start cutting, which began with my Davos interview with David Cameron.

Last week, to me, Mr Cameron said that the Tories’ deficit reduction plan “must start in 2010”, even if Britain has relapsed into recession. He did say, even then, that the precise scale of the cuts would be coordinated with the Bank of England. He spent the next couple of days emphasising that the cuts would not be “particularly extensive” and “not swingeing”.

The IFS position, and that of Barclays Capital, is that now is the wrong time to start further cuts at all, pointing out that “the UK is withdrawing its temporary fiscal support for the economy earlier than almost all other G20 countries”.

So the message from the IFS is: don’t cut now but plan credible larger cuts for the entirety of the next parliament. It undermines both Labour and the Conservatives.

It suggests that the Tory “cuts now” agenda is misplaced. And the Labour sluggish post-election deficit reduction plan is also misplaced. And it’s a further feather in the cap of Uncle Vince Cable.

* The really scary thing was the macroeconomic forecast from Michael Dicks of Barclays Capital, which accompanies the Green Budget. More on that tomorrow.