Cameron takes deficit amnesia to a new level

October 1, 2014

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

David Cameron crowed when UK opposition leader Ed Miliband forgot the deficit in a keynote speech last week. Yet Britain’s prime minister has now taken deficit amnesia to a new level, insisting on the need to tackle the country’s biggest problem while simultaneously pledging a tax giveaway. It’s an electoral bribe he can’t afford.

The blatant politicking is deeply unhelpful given the awful state of the UK finances. Cameron has made eliminating the deficit his chief goal. That means being tough on spending, and on taxation.

His pre-election promise of a rise in the threshold for paying income tax from 10,000 pounds ($16,200) to 12,500 pounds offers welcome support to the low paid. But the proposed increase in the threshold for the 40 per cent rate, from 41,900 pounds to 50,000 pounds, makes no economic sense. It does, however, make political sense. It appeals to one of the core constituencies of Cameron’s Conservative Party, middle-class voters who resent seeing more of their earnings slip into the higher-rate tax band.

The cost of all this is high. The initial view of the Institute for Fiscal Studies, an independent think tank, was that the measures would deprive the Treasury of about 7 billion pounds in revenue. That sum now needs to be added to an overall fiscal deficit running at around 100 billion pounds, not far short of 6 percent of GDP.

George Osborne, the chancellor of the exchequer, promised to eliminate the UK’s deficit entirely. His efforts aren’t going well. In April to August, the deficit was 6 percent higher than a year earlier, at 45 billion pounds. Osborne’s planned 25 billion pounds in cuts need to be raised to 38 billion pounds to eliminate the deficit by 2018, the IFS says.

The government can argue that tax cuts will help by spurring growth. But wages are weak and the PMI manufacturing survey for September, released on Oct. 1, was the worst for 17 months. A renewed slowdown in the euro zone will weigh on Britain. Cameron doesn’t have the money for giveaways. The irresponsibility dents his and his government’s credibility.

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