Coalition government on borrowed time

With David Cameron taking the stage at the Conservative Party Conference today, Public Finance‘s Mike Thatcher assesses how the UK’s coalition government has done on its stated aim of deficit reduction. It’s not looking good at half-time, he argues

As we approach the halfway point in the coalition government’s five-year term, it’s a good moment to analyse whether this rare form of UK governance has been a success.

Programme for Government

Any assessment of the coalition at halftime needs to revisit the Programme for Government published on 20 May 2010. This set out 31 measures, each with bullet point commitments for the term.

They were listed alphabetically, implying equal importance. Yet one measure was clearly more equal than the others: deficit reduction. David Cameron and Nick Clegg said in their foreword that ‘the most urgent task facing this coalition is to tackle our record debts’.

This was reinforced by a proviso at the end saying ‘the deficit reduction programme takes precedence over any of the other measures in this agreement’.

Getting the UK economy under control

In the end, the coalition will be judged by if and when it gets the UK economy back under control. So how is it doing here? In his Emergency Budget of 22 June 2010, George Osborne set out his overall objective for the public finances – also known as the ‘fiscal mandate’. This was to eliminate the structural deficit – the portion of the deficit that is not the result of the economic cycle – by 2015-16.

The chancellor, however, said he was taking a ‘cautious approach’ and aiming to meet the mandate a year early, in 2014-15. Of course, reducing the deficit was dependent on significant economic growth.

This did not transpire, and in the 2011 Autumn Statement Osborne admitted there would be at least two more years of spending cuts and that the mandate would not be achieved until 2016-17.

Double-dip recession

Since then things have gone from bad to worse. Growth has moved from stagnant to negative, pushing the UK into its first double-dip recession since 1975. UK net debt now exceeds £1tn, with borrowing simply not being reduced at the rate the coalition expected.

Borrowing was £127.6bn in 2011-12 despite the chancellor suggesting in the 2012 Budget that it would be £126bn. There is now doubt that the £120bn borrowing estimate for 2012-13 can be achieved.

The 2012 Budget has been a disaster for the chancellor. He’s been forced to backtrack on five tax announcements – pasties, caravans, charitable giving, church improvements and fuel duty. An occasional u-turn can be seen as misfortune; five in one Budget smacks of carelessness.

All in all, the coalition’s deficit-reduction programme has not been a roaring success. The timetable looks ambitious, the economy remains anaemic and the chancellor is far from surefooted.

Is it that bad?

However, what would the outcome have been if deficit reduction had not been the priority? Could things have been worse? Even Christine Lagarde, head of the International Monetary Fund, said ‘I shiver’ when she looked back at the UK’s deficit in May 2010 and imagined there being no plan to reduce it. In fact, only this week the IMF has cut its growth forecasts for Britain and warned in its annual fiscal monitor that Britain will miss deficit reduction targets this year.

But perhaps there could be a middle way. With the Eurozone in crisis, many commentators are calling on the chancellor to increase growth-friendly policies, particularly by boosting infrastructure spending and easing up on the fiscal pain.

Osborne did soften his stance in his June Mansion House speech, announcing a stimulus plan including an £80bn ‘funding for lending’ scheme. It wasn’t quite Plan B, but was described by the chancellor’s aides as a ‘maxing out of Plan A’. A full reversal to Plan B is highly unlikely, however. It seems the chancellor and his coalition colleagues will sink or swim by their austerity agenda.

Why the next spending review is the ultimate test

An important test will be the next spending review, expected in 2013. But there are political as well as economic risks here. It will be tough for the Conservatives and Liberal Democrats to agree another three-year spending plan just as they need to emphasise policy differentiation ahead of the 7 May 2015 general election.

How this circle is squared will partly determine the character of the second half of the term and the future electoral performance of the two governing parties.

Mike Thatcher is editor of Public Finance magazine

Mike Thatcher is Senior Publications Manager at EY.