Reducing costs is best route for debt-free UK

Imagine you have a friend who is a bit short of cash. They have explained to you that they need a loan to get them over a rough patch this week, but that they are cleaning up their act and in a few weeks will pay you back.

You might even lend them a bit of cash. If, however, a couple of weeks later you see them out partying and they clearly haven’t cleaned up their act – you may not feel so happy about this.

The situation with the government deficit is much like this. The government needs to borrow over �150,000,000,000 (that’s billion – but the noughts are compelling) between April 1 2010 and March 31 2011 to cover the difference between tax income and expenditures on services and benefits. Those people who are lending the government money want to be certain they will get their money back. If the government says, as the coalition has done, that it is cleaning up its act and won’t need to borrow in a few years’ time, then those with the readies are more willing to lend money. More importantly, the lenders will lend the money at a lower interest rate.

In 2015 – when this parliament ends – government debt will be more than �1,000,000,000,000 (one trillion pounds). The government is planning on cutting the amount borrowed each year, but isn’t planning to pay back any debt as getting borrowing down is seen as a good strategy and a matter of urgency.

This is important because the interest rate the UK is paying on 10-year debt is now 3.12 per cent. Ireland is paying 5.82 per cent and Greece is paying 11.37 per cent (four times as much as the UK). Greek debt has a much higher interest rate because lenders are worried that Greece will not pay them back. Ireland, which is not in as bad a state as Greece, is still paying 2.7 per cent more interest than the UK.

These figures sound small as percentages, but on �1,000,000,000,000 of debt that would be �27,000,000,000 A YEAR. You can do an awful lot of good with �27billion a year.

Labour is saying that the coalition is planning to reduce each year’s borrowing by too much. This means that under Labour’s plans we would have to pay interest on both more debt and also a higher interest rate. If they want to do this then they need to explain where they will get the extra �27,000,000,000 a year from. Would that be more cuts or more tax? �27bn is another five per cent on VAT.

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Tony Blair has admitted in his memoirs that Labour lost control of the public finances. He said “... from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit.”

Tony Blair, as with Alistair Darling, wanted Labour to have increased VAT. He said in his memoirs that Labour should have had “a gradual rise in VAT”. Labour today has been beating the drum about VAT being a regressive tax, but Tony Blair claimed to be a progressive. In fact when you look at the size of household incomes VAT is a mildly progressive tax. A higher proportion of wealthy households’ income is taken in VAT than poorer households. The poorest households actually get a cost of living increase that more than covers the extra VAT they pay.

The reason there is an argument about whether VAT is progressive or not is that there is a dispute as to whether you should compare households by the size of their budget (expenditure deciles) or how much declared income they have (income deciles). The coalition believes that looking at expenditure is a better comparison. Many households have undeclared income or are students living on their parents’ income, but in a separate home. Those figures skew the income anaylsis, which is why the budget size is important.

Another point highlighted by Tony Blair’s memoirs is that “if you study the figures for government projections in the UK, by the end of 2014 public spending will still be 42 per cent of GDP.”

The coalition government’s financial plans are rational. They involve less cuts in the long term than Labour, although more in the short term. They are also progressive in that the costs for richer households are more than the poorer households.

The unions are now campaigning against any cuts at all and threatening strikes against short term cuts. They need to recognise that in doing so, they are calling for greater cuts in the long term as are Labour – who thus far have refused to utter a dickybird as to where they would have cut. We will, however, continue doing what is right and fair for the UK and we will concentrate on protecting the weaker in society.

Lynne Featherstone is the Liberal Democrat MP for Hornsey and Wood Green.