Checking the Treasury’s sums
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Today’s Green Budget from the Institute for Fiscal Studies (IFS) and Barclays Wealth is essentially an accountant’s view of Britain’s economic outlook. Although it is a valuable exercise it has its limitations.
The importance of the report is as an objective assessment of the state of Britain’s public finances. Clearly the government has an interest in understating the country’s economic problems and shying away from making unpopular decisions explicit. In contrast, the opposition arguably has an interest in talking up economic problems.
“The job of politicians is–or at least should be–devising alternative visions of society and working out how to achieve them”
Under such circumstances it is not surprising that the IFS report is generally more gloomy that the Treasury. For example, while the Treasury is predicting a fiscal tightening of 4.1% of national income between 2010-11 and 2015-16, the Green Budget suggests it needs to be about 5%. That would mean an additional £13 billion of tax increases or spending cuts in 2015-16 on top of that already predicted in the pre-budget report (PBR).
Even more grim is the forecast for Britain’s trend rate of growth. The PBR assumes 2.75% as its central estimate while the IFS says it is close to 1.75%. Although one percentage point may not sound a lot when compounded over time it makes a huge difference. (article continues below)
However, economics should be about more than balancing the books. The job of politicians is–or at least should be–devising alternative visions of society and working out how to achieve them. In economic terms that should mean thinking up a framework for restructuring the economy and raising the trend rate of growth.
