Rt Hon Lord Lilley

    The aim of this and all budgets in this Parliament must be to rebalance the nation’s finances and, the other side of the same coin, to rebalance the real economy. Brown’s catastrophic spending spree left public spending way out of line with tax revenues and the public sector way out of proportion to the private sector and particularly, industrial output, investment and exports.

    We should hold these rather banal truisms in mind when evaluating the options open to the Chancellor.

    To bring public spending and tax revenues into line the Chancellor has two tough options – and two ‘painless’ options.

    The two tough options – cutting public spending and raising taxes – are both painful and difficult. However, only one of them – cutting public spending – promotes the necessary rebalancing of the economy between an overblown public sector and an inadequate private wealth producing sector. By contrast, raising taxes inevitably means cutting the size of the private sector and reducing the incentives which drive its growth. So we should reject siren calls for more taxes.

    This year’s favourite is a ‘mansion tax’ better called a ‘home ownership tax’. Like all new taxes its advocates say it will fall just on ‘the rich’. Income tax was initially just for the richest few percent but rapidly spread to most of the working population. Sales taxes started off as taxes on luxuries but soon spread to almost everything via VAT. It is a racing certainty that a tax on homes would soon spread from mansions to every owner occupied dwelling just as property taxes have in every other country which has adopted them. And the resources it would syphon off would mean a smaller and less dynamic private sector.

    Cutting spending is never easy. But since we have ring fenced such large areas of public spending cuts restricted to the non-ringfenced sectors must inevitably be pretty draconian. Ring fenced areas include: the largest single item of spending which is state pensions now guaranteed to rise by the higher of prices and earnings plus associated benefits, health, (implicitly) schools and universities, military equipment, foreign aid, and the EU budget. I take the old fashioned view that one should keep election pledges, at least in spirit, if at all possible – even if they were unwise. But sadly we need a frank debate about whether it is possible to keep them all. We should certainly seek savings which are in line with the spirit of the pledges. For example, selling development assets or recognising that military assistance in violent states like Afghanistan is the best form of aid and should come from DfID’s budget. Raising the age at which the elderly are entitled to heating allowance and other benefits could also be on the agenda.

    The two allegedly painless options come from opposite ends of the political spectrum.

    When the Left calls for a ‘growth strategy’ it is code for increased spending and borrowing. They have to speak in code because the public find it difficult to swallow the notion that the way to get the deficit down is to increase it. At best a burst of public sector investment (if there were sufficient ‘shovel ready’ projects which given the snail like pace of public sector decision making is unlikely) might give a short lived fillip to activity. But only at the expense of aggravating and prolonging our debt problem.

    The Right, on the other hand, calls for sweeping deregulation and tax cuts funded by additional spending cuts. They would both be good for economic growth in the long term. Indeed, our success in generating a million extra private sector jobs is largely the result of Thatcherite labour market reforms. We need more of the same. But we should not kid ourselves that they will boost economic growth perceptibly before the next election. I remember being disappointed by how much longer it took than we had expected for the Thatcher tax cuts and deregulation to stimulate growth – even though in the long term they proved much more successful than we had dared hope.

    The best the Chancellor can do to give a short term boost may be time limited tax incentives to prompt the private sector to bring forward investment. Send him your suggestions on a postcard please.

    Otherwise he will have to continue the hard grind of cutting public spending and unnecessary burdens on business and households while encouraging lenders to write off bad debts asap. And, unfashionable though it may be to say so, we will have to learn the virtues of patience before growth picks up.

    There is one area where there are economically painless options but unfortunately they involve a high cost of political embarrassment. That is energy policy. Low cost energy is one of the drivers of industrial activity and a boon to household budgets. Unfortunately we signed up to what Delingpole dubbed the Lib/Lab ‘watermelon ideology’ – Green outside, Red inside – and committed to replace the least costly energy from fossil fuels by renewables costing upwards of twice as much. This is a recipe for de-industrialisation and fuel poverty.  The sooner we scrap these costly green subsidies, taxes and targets the sooner we will get our manufacturing economy back on a growth track.

    Moreover, Providence appears to have endowed Britain with potentially massive resources of shale gas. We won’t know for sure until we allow the companies to drill and test. If successful it will either drive down gas prices as it has in the States to their huge advantage or, if gas prices remain at European levels, it will generate huge tax revenues enabling Britain to reduce other tax burdens on business and households. Either way shale gas will displace expensive and less reliable imports. It beggars belief that, given a potential major new industry capable of generating tens of thousands of jobs directly where they are most needed and hundreds of thousands indirectly, the response of our Energy Secretaries – blinded by Green Ideology – has been to drag their feet, impose an eighteen month moratorium and give credence to wholly spurious fears. Over a hundred thousand fracking wells have been drilled in the US and not a single person has suffered from water pollution nor a single building been damaged by earth tremors. Huhne’s greatest offence was not having his hands on the wheel but putting his foot on the brake of shale gas. George Osborne has forced his successor to take his foot off. Now he should insist DECC and the Planning Department accelerate development with all possible speed.

    We need a budget to energise the private sector by reducing the burden of an overlarge public sector, incentivising the private sector and releasing the energy under our land.