From the TUC

The amazing shrinking borrowing requirement and why Robin Hood is the answer to low growth

14 Jun 2010, by in Economics, International

Urgh – it’s difficult writing blog headlines for complicated stories! The new Office for Budget Responsibility (OBR) gave with one hand and took with the other today, which one guesses wasn’t the Government’s plan. It revised downwards both the Government borrowing requirement (meaning the public finances aren’t as disastrous as people have suggested), and the growth projections (meaning the recovery is more anaemic than hoped). Meanwhile, the French President and German Chancellor made their most high profile call yet for the Robin Hood Tax. Here at the TUC, we think that what all this means is that next week’s UK budget should avoid massive cuts in spending and regressive tax rises such as VAT. Not only are they unnecessary, they would be actively harmful. Here’s why. 

First, the amazing shrinking public sector borrowing requirement. In Alistair Darling’s last budget, the predicted government borrowing figure for 2009/10 was £167bn. Figures produced just recently suggested that – because the economy had performed a bit (yes, only a bit, but look at the impact) better than expected, the borrowing figure was in fact down to £163bn. Today’s OBR report suggested an even smaller borriwing figure of £155bn. These are of course mind-numbing figures, but Government expenditure as a whole is over £600bn a year, so what’s important is that in the space of less than three months, the borrowing figure has been reduced by 8%. That’s how powerful just a little bit of growth can be – and it indicates quite clearly that the simplest and best way to reduce the size of public debt is to promote growth.

But the OBR report cut the growth projections from 3.25% to 2.6%. Again, although that doesn’t look like a huge difference, even small changes in the growth figures mean vast sums of money. But what that means is that measures which would reduce growth need to be avoided, and that means you don’t cut government spending (which has a double whammy effect, reducing the amount the Government buys and the purchasing power of those public servants paid reduced real wages whilst simultaneously increasing the costs of unemployment by putting people out of work). And you don’t want to be putting up the cost of buying things by increasing VAT, either – because that too reduces economic activity.

Overall, the figures released today show that, contrary to what the Government has been saying since it was formed – that the public finances are in a worse shape than everyone thought, and public spending must be cut, is actually the very reverse of the truth. The public finances are better than was thought, and cuts or regressive tax rises would only make matters worse. The IFS’ Robert Chote said on Newsnight that the cuts proposed in Darling’s last budget and the £6.2bn announced last month, coupled with a rise in VAT to 20% would be enough.

Overall, the latest cuts and a VAT rise would raise about £17bn. But those cuts themselves would hurt, and the VAT rise would be bad for growth. So it’s a good thing that there is an alternative – the Robin Hood Tax, as the TUC calls it (or financial transactions tax – FTT – as the leaders of France and Germany call it). IPPR research last week suggests that the Robin Hood Tax would raise about £20bn and would fall not on the cash-starved poor but mostly on the bloated bonus-fuelled rich.

So it’s music to the ears to hear that France and Germany are calling on the G20’s leaders to introduce an FTT. They probably won’t do that when they meet in Canada next week, but that means we should be redoubling our calls for the UK, and/or the EU, to do it instead.

4 Responses to The amazing shrinking borrowing requirement and why Robin Hood is the answer to low growth

  1. Tweets that mention The amazing shrinking borrowing requirement and why Robin Hood is the answer to low growth | ToUChstone blog: A public policy blog from the TUC — Topsy.com
    Jun 15th 2010, 12:39 am

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  2. Daily Cuts Briefing – Tuesday 15th June « A Thousand Cuts
    Jun 15th 2010, 9:28 am

    […] TUC’s Touchstone blog carries some concise analysis of how the OBR report makes a nonsense of the government’s public spending cuts, while Left Foot […]

  3. The Squeeze
    Jun 15th 2010, 10:43 pm

    Replacing VAT with a tax on spreads for financial transactions on an EU level could possibly be good for growth in the real economy, it’d be a bit of an experiment, but should be looked at, because VAT is regressive.

    The trouble is, this is just being proposed as an extra tax to shower on quangoland, hand over to corrupt foreign regimes and spend on windmills.

    If trade union land ditches the fairytales and childish rhetoric they might find they have more support for this among normal consumers and employers.

  4. Owen Tudor

    Owen Tudor
    Jun 15th 2010, 10:48 pm

    I absolutely agree about dropping fairytales and childish rhetoric. But your advocacy of that would be enhanced if you avoided them yourself! (“Quangoland”, “hand over to corrupt foreign regimes” and “windmills” – that’s reasoned debate, is it?)