Tories and Lib Dems take the path of least resistance to plug the deficit

It’s hardly a shock that VAT will rise and benefits will be cut in George Osborne’s emergency budget in a few weeks time, but don’t take my word for it, the well respected boss of the Institute of Fiscal Studies Robert Choke said this yesterday :-

The parties have agreed to cut planned spending on ‘non-frontline’ public services by £6 billion this year, as the Conservatives wanted, but have said that an unspecified proportion of the savings “can be used to support jobs” (rather than directly to cut the deficit). They have also agreed on a “significantly accelerated” fiscal tightening over the course of the parliament. But whether this would be a bigger or faster tightening than that already implied by the Conservatives’ pre-election fiscal targets is unclear. We assume that the Conservatives were looking for a tightening of 4.7% of national income by 2015–16 compared to the tightening of 4.1pc of national income implied by Labour’s final Budget. But neither coalition party was unambiguous in its fiscal objectives before the election.

As regards the composition of the tightening, the agreement stated that “the main burden of deficit reduction [should be] borne by reduced spending rather than increased taxes”. But it did not specifically endorse either the 4:1 split proposed in the Conservative manifesto or the 2½:1 split implied by the Liberal Democrat manifesto. But the agreement did endorse the Conservative plan for year-on-year real increases in NHS spending and a large real rise in overseas aid. This suggests an intense squeeze on the budgets of other Whitehall departments in the spending review due this autumn. It also leaves open the option of tougher action to cut social security spending and does not rule out the possibility of significant net tax increases (perhaps most likely a rise in VAT) in the forthcoming Budget.” (The bold was added by the Telegraph’s Economic Editor)

Another concerning development yesterday was the Bank of England Governor Mervyn King getting involved in political debate and endorsing the new Government plans – the role is supposed to be non political and Mervyn King has stayed away from talking policy until now, so let’s hope it’s a one off or it could set a worrying precedent.Any source