Listen hard and you can almost hear the whispers in the Chancellor’s ear. ‘Steady as she goes,’ they murmur. ‘Hold your nerve, stay the course and eventually the recovery will come.’
Last week the Moody’s credit rating agency joined the chorus: the economic outlook for Britain is negative, but nothing can be done.
In my view, the Chancellor does still have the power to shape events. Next month’s Budget is his last chance to make a real difference to Britain’s economic prospects.
At some point, growth will return to the British economy. Eventually, unemployment will start to fall. But how much more pain must families and businesses endure in the meantime, and how much long-term damage will be done as a result?
So he must ignore the do-nothing voices. The Chancellor should deliver a Budget for jobs and growth – with fair tax cuts for families at its heart.
Only eighteen months ago, the Government was so confident their plan would work: cutting the size of the state would pave the way for a private-sector led recovery.
But it hasn’t worked. The recovery stalled well before the Euro crisis started to have any impact on Britain. And the plan has not only failed on jobs and growth, but also on the very terms George Osborne himself set: balancing the books by 2015 and keeping the credit rating agencies happy.
In the US, which has taken a more balanced approach to deficit reduction and supported the recovery, the economy is now bigger than it was before the crash and unemployment is falling.
Here in Britain unemployment is rising, our economy is still nearly 4 per cent smaller than before the crash and we are now facing a weaker recovery even than in the 1930s.
Of course, tough decisions are needed on spending, tax and pay to get the deficit down. But if you go too far and too fast, choke off the recovery and push people out of work, you end up borrowing more and permanently weakening the economy.
And it not just spending cuts which have gone too far and too fast, but also tax rises on families and pensioners – like the hike in VAT, which crushed confidence, costing a couple with children £450 per year each year.
That is why the Chancellor should announce a temporary reversal of his VAT rise. This is part of Labour’s five point plan for jobs, which also includes tax breaks for small businesses taking on extra workers and bringing forward essential infrastructure investment.
Such a tax cut now would boost confidence, help families feeling the squeeze and help get our economy moving again. It would cost £12 billion to do it for a year. Given the government is set to borrow £158 billion more than planned because of slower growth and higher unemployment, the argument that we cannot afford this boost is absurd.
Some people may be surprised to see Labour prioritising tax cuts. But in a crisis there is a premium on what works effectively and quickly to get our economy moving.
But if George Osborne can’t bring himself to reverse his VAT mistake, he has other options. For the same amount of money, he could cut the basic rate of income tax by 3p for a year. Or raise the income tax personal allowance to over £10,000. Or increase tax credits for almost 6 million working people by around £2,000.
It would be better to cut VAT now – it’s fairer and quicker and would help pensioners and others who don’t pay income tax. But any substantial tax cuts to help households and stimulate the economy would be better than doing nothing.
Without that decisive action in the Budget to boost growth, I fear we are in for a lost decade of slow growth and high unemployment which will leave a permanent dent in our nation’s prosperity.
Remember the 1980s. Of course, action was needed then to get inflation down from its 13 per cent peak. But who now doubts that the depth of the resulting recession did permanent damage?
Manufacturing jobs and companies lost – never to return. Small businesses bankrupted – losing skills, ideas and potential. Infrastructure plans first postponed, eventually dropped and never resurrected. Adults and young people out of work for years, leaving a permanent scarring effect on their skills, their health, and their ability ever to work again.
But thirty years on, the risks are even greater. After all, China is currently producing more graduates a year than the whole population of Scotland. And adults in Brazil are already twice as likely to be running their own business as Britons.
At the very time that we should be putting in place the long-term reforms we need – on skills, infrastructure and long-term capital market reform – the British economy is stuck in a rut with companies afraid to invest, long-term unemployment rising and no industrial policy.
In 1925, Chancellor Winston Churchill bowed to pressure from his advisers and stuck to the policy of returning sterling to the Gold Standard. He regretted it for the rest of his political life.
For all our sakes, I hope this Chancellor has the courage to ignore the do-nothing voices and take decisive action to boost growth. But time is fast running out.