Partner Article

The Budget: Government doesn't know the next step

I must start by confessing that I am usually pessimistic about the UK’s economic prospects and that readers should apply a percentage ‘tilt’ factor to have a more balanced view.

That said, I realised after the Budget announcements at the end of March that the coalition government doesn’t know what to do next.

The rate of deficit in the public finances is not decreasing and we are borrowing £1 out of every £5 of government spending.

Public borrowing is going up at a steep rate. George Osborne now says that he will require the Bank of England to take heed of the need for ‘growth’ and not just inflation.

Since the inflation target of 2% has long been neglected, this looks suspiciously like asking the Bank to print more money, lots more, which will have the effect of devaluing public debt, making it cheaper to pay back and might, just might, kick-start the economy if people believe that conditions are ‘improving’.

The risk is that buyers of government debt, once they realise what’s being planned, will want much higher interest payments.

Since we already spend about £120 million per day on interest, more than we spend on defence, then another hike will costs tens of billions more, just to service the debt.

Sterling will tumble, imports will cost more (pump prices will go way over £1.50 per litre) and the rate of inflation will reach 5% or more.

Printing money in order to reduce debt is cheating the next generation. They will be paid back in devalued money and will not thank us for robbing them.

There are always victims of inflation, it is not a victimless crime. Most of the people and institutions who lend money to the government are British, not faceless foreigners. They are our pension funds, financial institutions and yes, our banks.

What do we do now? Is it too late for ‘honesty’ on the part of government and opposition to stop pretending that there’s a magic wand to wave? Building more houses? Like they did in Ireland and Spain?

I believe that the first political party that said to the public that we are not going to grow for ten years and that we have to radically reshape our economy and starting producing lots more goods and services that people want to buy, will gain a lot of respect and support.

• Cut the red tape (starting with the requirement from April for all businesses to submit monthly returns to HMRC –what idiot thought that one up?).

• Simplify the tax system, from the current 9,000 pages of primary tax legislation to no more than 500 or even 50.

• Make it harder to start a new business by requiring a minimum capital base of £50K in order to have limited liability. Sounds perverse? Consider the nearly 500,000 startups each year, the majority of which will fail, because they run out of money. Raise the hurdle, then fewer, better funded companies can be helped with additional finance. Why should the banks lend to a sector with a 70% + failure rate? That’s why they demand personal guarantees.

• The EU is curbing bankers’ bonuses, I wish it had been our government, but at least our best and brightest have less incentive to seek a lucrative career in the City now.

• Reduce company taxes on SMEs and I mean reduce, not pennies here and there.

That’s my list of recommendations, surely the Government could take a few pointers from here?

This was posted in Bdaily's Members' News section by David McCauley .