Last November, the Office for Budget Responsibility substantially downgraded its growth forecast. It also highlighted the need for a further £15bn of annual spending cuts or tax rises by 2016.
The government’s fiscal strategy is vulnerable on two fronts. Weak growth is putting pressure on plans to cut the deficit, yet there is no adequate strategy to boost it. Meanwhile, the government’s deficit reduction credibility has taken a knock since they have decided to wait until shortly before a general election to tell us how they plan to distribute the extra £15bn of fiscal pain.
This paper makes the case for bringing forward the unidentified £15bn of austerity measures that have to be made in the next parliament, and spending the extra £50bn this would save over four years to stimulate the economy and cut unemployment through investing in infrastructure.
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.
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.