Think tank urges Osborne to channel £50bn of savings from axing low-growth measures to kick-start the economy

20 February 2012

George Osborne should use the Budget to bring forward the unidentified £15bn of austerity measures that have to be made in the next parliament, and spend the extra £50bn this would save over four years to stimulate the economy and cut unemployment through investing in infrastructure, a think tank has said today.

The Social Market Foundation's paper Osborne's Choice, identifies a series of policies – including higher-rate pension tax relief and the winter fuel allowance – that do little to enhance growth, and argues for these policies to be axed. The think tank says that money saved should be channelled into transport and energy infrastructure projects that are vital for economic growth.

According to the SMF, this would offer a £10bn boost to economic activity in each of the next three years without altering the existing deficit reduction plan. It would also have twice the stimulus effect of reversing last year's VAT rise, and would be three times as potent as an immediate unfunded increase in the personal tax allowance to £10,000 - in contrast to the SMF plan, these would add billions to the deficit.

"The political debate on the economy has become unhelpfully polarised, with the future strategy presented as a choice between sticking to the status quo or borrowing more in pursuit of growth," said Ian Mulheirn, Director of the Social Market Foundation and author of the report.

"But the OBR's game-changing assessment last November that there will have to be a further £15bn of cuts by 2016-17 creates the opportunity for a potent growth strategy within the existing borrowing plans. By changing the composition of government taxation and spending, rather than altering the size and speed of cuts, the Chancellor can make his existing plan much more growth-friendly".

Instead of choosing between austerity and growth, the SMF's paper makes the case for a framework which focuses on the 'multiplier effects' of different policies, arguing for careful discrimination between policies that boost GDP and those that don't.

It calls for immediate implementation of five specific growth-friendly cuts: halving higher rate tax relief on pension contributions; capping maximum ISA holdings at £15,000; rolling child benefit into the existing tax credits system; cutting winter fuel payments and free TV licenses to better off pensioners; and scrapping free bus travel for the over 60s.

The SMF argues that this new approach breaks out of the artificial debate that sees deficit reduction and growth as a trade-off, allowing the Government to act on both fronts simultaneously.

Ian Mulheirn continued: "The recent Moody's outlook downgrade makes it clear that cutting the deficit and retaining credibility in the bond markets must remain a priority, but low growth is now a real danger to the UK's creditworthiness.

"Our plan would unambiguously strengthen the Government's deficit cutting credibility and increase economic output without borrowing a penny more. That would go a long way towards reassuring the holders of UK government debt as well as potentially taking tens if not hundreds of thousands of people out of unemployment. By refreshing our infrastructure, this plan would also lay the sorely needed foundations of the new economy that must emerge from the crash."

Notes to Editors

  • Osborne's Choice: Combining fiscal credibility and growth is by Ian Mulheirn.

  • The paper includes responses from a number of respected economic commentators, including Gavyn Davies, Evan Davis and Sir Richard Lambert. Full responses can be viewed online

  • Ian Mulheirn was appointed Director of the Social Market Foundation in October 2008. He joined the Social Market Foundation as the Chief Economist in February 2008, after three years as an economic advisor at HM Treasury. He has worked in a variety of policy areas including child poverty, savings & investment, welfare to work and higher education funding.

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