London, 24 June 2010 – Sir John Gieve, the former Deputy Governor of the Bank of England and senior adviser to GLG, below offers his response to the emergency Budget.
‘”One key test for this Budget was whether the coalition could produce a plan to reduce the deficit which was fast enough to satisfy the markets and yet would be deliverable politically. It has met the first half; there must be some uncertainty on the second until the Spending Review is completed in the autumn.
“A second test was to reduce the deficit in a way that does not cause growth to stall. The judgement in the Budget is first that markets would have enforced a greater slowdown, through interest rates, if the plan had allowed the deficit to persist (a modern version of Thatcher’s “Tina” – “there is no alternative”); and second that zero interest rates and the fall in the pound will more than offset the impact of fiscal tightening. While most forecasters agree with that, there is not much left in the monetary locker if world growth falters.
“The OBR’s projections on the deficit look cautious. They assume that most of the improvement in tax revenues this year will not be sustained and their central growth forecasts are well below the Bank of England’s. If the Bank is right the deficit should come down faster still, potentially allowing some tax reductions at the end of the Parliament.
“The Chancellor has limited the burden of cuts in mainline programmes by raising VAT, freezing public sector pay and cutting benefits. There is the prospect of further savings on public sector pensions when Hutton reports. However the asking rate for cuts on most departmental programmes is daunting and goes well beyond efficiency savings. It will require a fierce and prolonged squeeze on spending even in the favoured areas – the NHS, police, and schools – and some big policy decisions in areas like prison sentences, care for the elderly, the future of the navy and air force, legal aid, transport and university tuition fees.”