George Osborne chose a public lecture with the Anders Borg, Swedish Minister of Finance at the LSE to identify the first fiscal steps that the Conservative party plan to take, if voted into government, last Thursday.
As one LSE student in the audience commented, the British Shadow Chancellor of the Exchequer was “every bit the politician” as he criticised the Labour party’s lack of economic sense in dealing with a £178 billion budget deficit. Indeed, Osborne stated that Labour’s pledge to increase public spending by 2% is irresponsible, “driven by a looming election and not an economic reality”
Osborne also stated that, “if you find yourself on the wrong road, find an exit”, thus launching the Tory’s strategy to guide the UK economy onto the right path. Such is the perceived desperation of the situation that Osborne proposed an immediate spending cut within weeks of winning the election, even before the first official post-election budget. According to Osborne, several areas of the current budget which “represent poor value for money” will be targeted in the spending cuts; “excessive spending on things like advertising and consultants, spending on tax credits for people earning over £50 000, and spending on child trust funds for better off families” are amongst the areas to go. Other more long term strategies such as the pay-freeze for five million of the top earning public sector employees will add to the spending cuts.
Osborne was eager to stress that any government “must not balance the budget on the back of the poorest”, committing the Conservative’s to policies that pursue social-cohesion, a task that was deemed exceptionally important by Anders Borg, Sweden’s Minister of Finance, in his speech. Certainly, Osborne agreed that Sweden will be an important role model in dealing with “one of the most difficult fiscal challenges in our history”, emphasizing that the UK will benefit from learning from other countries.
Borg set out some strategies in dealing with fiscal difficulties in his speech. Providing a wider perspective, Borg commented on the problem facing all EU countries with an average budget deficit of 7% of GDP, as well as countries such as the US, Japan and India who “will all be running fiscal deficits over 10% in 2009”.
Borg further argued that these deficits must be taken seriously as the current fiscal status of some countries is not sustainable, especially with immanent demographic challenges such as the ageing population of the UK and many other EU countries: “The only certainties in life are death and taxes. Well, I’d like to add a third uncertainty: future economic crises… we need to be ready for it.”
Borg neatly laid out ten key “lessons from Sweden” that countries can use to consolidate their outstanding fiscal issues. Amongst these lessons, Borg included increasing taxes but used an OECD study to support his belief that any taxation should focus on products with negative externalities such as alcohol and carbon dioxide rather than income or corporate taxes. Furthermore, expenditure reduction was identified as a key element for recovery. Borg, however, stressed that efforts should be made to preserve “spending that enhances growth and employment prospects”.
The importance of protecting labour force participation was pressed by Borg throughout his speech as a key element government’s must consider when building sustainable recovery.
Perhaps most interesting with the emphasis that Borg placed on the credibility of the government. Any uncertainty in government decision making could lead to higher interest rates, a rise in inflation and stubborn fiscal policy warned Borg. Credibility is vital in ensuring that household consumption does not fall. Indeed, Borg set out that countries could build the trust in their governments with “transparency and honesty” as well as providing conservative goals and being flexible in policy approach. In support of what Osborne would go on to say, Borg encouraged governments to take advantage of the “window of opportunity to act” just after an election, when the public will best support decisions on public finance.
Although, as one member of the audience pointed out in a question, Sweden and the UK remain significantly politically and demographically different, both Borg and Osborne seem to believe that there is increasingly common ground between the two countries in terms of the economy.