A credible start

Today’s Emergency Budget announced the most ambitious fiscal consolidation programme in decades.  It sets out a framework returning the government broadly to a state of fiscal solvency by 2014.  To do this, George Osborne announced a deficit reduction programme amounting to just over £100 billion in real terms – entirely in line with our recommendations.  The ratio of spending cuts to tax rises – 74:26 is largely in line with the international best practice model (which we also endorsed) of 80:20.
 
Instead of government living well beyond its means for the next four years, we estimate that the Chancellor’s plans will reduce the structural deficit – in other words, the additional borrowing which will not disappear when the economy recovers – to just over 1 percent of GDP – far smaller than the 2.8 percent implied by the previous government’s plans.  It will also reduce spending to about 40 percent of GDP by 2015 – around the level which prevailed in the 1990s – eliminating the huge hike in spending since 2005.