Chris Fletcher, Policy Director at Greater Manchester Chamber of Commerce, looks at how the state of the UK's finances will affect government policy.
Over the last few days the phrase ‘black hole’ has been used so often in conjunction with the country’s finances you’d think Brian Cox had got a job at The Treasury.
Leading into the election and in the days following it, a great many people and organisations, including the Chamber, were sounding notes of caution around the dire state of government finances and saying this could genuinely scupper Labour’s pre-election promise of no tax rises.
The UK’s financial situation hasn’t been great for a while and, like any fiscal equation, when faced with a deficit you either increase income or cut spending.
So, it could be said that the new government was being put in a potentially similar position to the coalition government in 2010 – remember the infamous ‘there’s no money left’ note?
However, it’s one thing accepting that the finances are not great, it’s another to then find out that they are worse than anticipated with overspends across a range of departments and initiatives – all summarised as a ‘black hole’.
Following Monday’s statement by the Chancellor we now know that the overspend is £22bn give or take the odd £100m.
Who knew what and when about this will no doubt fill news and media for days to come – that’s politics. Personally I’m not too bothered about this unless of course there has been some form of deceit which then does create some concern about how robust the whole financial forecasting and modelling function is. An issue that the Chancellor seems determined to establish. What matters more is how the government chooses to take action.
Taking away all the ‘he said, she said’ politics of blame, the simple truth is that the first statement from the Chancellor in the Commons will be mainly remembered for what Labour are not going to do and what they will stop. There is a substantial list; from winter fuel payments for some pensioners to scrapping infrastructure projects, calling time on a range of departmental practices around consultants and a whole lot more besides, though all these only total £5.5bn in immediate savings - leaving £16bn still lurking in the ‘black hole’.
The key to Labour’s approach to the economy is shoring up the foundations without damaging the early signs of economic recovery and then work out how best to kickstart growth. But this won’t happen overnight and will need government investment, something we’ve heard a lot about in its first month in office but which may prove difficult to deliver within current financial constraints.
One of Labour’s big pre-election promises was ‘no tax rises’. Whilst cost cutting may, for now, stave off some of the overspend the expectation is for some form of tax rises to be announced in October’s Budget. It’s truly difficult to see how these can be avoided and maybe Monday’s announcement was a way of preparing the ground in advance?
This is a very delicate balancing act. The theory is that if you go too near to a black hole the dense gravitational pull drags you in and you will never get out – even light can’t escape hence the term black hole. You cross what’s known as the event horizon. The government isn’t there yet but the ‘pull’ of the whole financial situation – embodied by the ‘black hole’ could be enough to knock the strategy off course. The budget and Spending Review on 30th October will be a key test of how the government responds and what its future financial strategy will look like.