by Dr Steven King
The first APCO Worldwide – LSE European Institute ‘Perspectives on Europe’ lecture of 2010 drew a large crowd last night. While many were there to hear the Swedish finance minister, Anders Borg, eloquently describe how the Swedish economy was turned around in the early 1990s during the Moderate (conservative) Party’s last period in office, the media turned out in force because George Osborne, the shadow chancellor, had offered at just 24 hours notice to give a response.
The Tories’ interest in the Swedish model of educational reform is longstanding and well known but Osborne revealed that other policies had been picked up on trips to Stockholm as well. The Moderates created a Fiscal Policy Council that independently evaluates the sustainability of the public finances and future spending plans. Helping to ensure the finance minister of the day keeps to his or her promises on spending and borrowing keeps Swedish interest rates down and ensures greater economic stability, the Moderates argue.
The Tories agree. Their Office of Budget Responsibility will have much the same function, making recommendations about how much fiscal tightening or loosening it thinks necessary to have a better than 50% chance of meeting the chancellor’s mandate for the public finances.
Viewed from the UK, the intense interest in the Swedish model is understandable. Saab’s future might be bleak but, worldwide recession notwithstanding, the Swedish national finances are roughly in balance. Borg even hopes to record a budgetary surplus in two years’ time. A simple graph contrasted Sweden and Bulgaria at one end of the European scale and the UK, Ireland and Greece with their 10%+ budget deficits at the other.
Borg had four main points. First, that a serious deficit situation had to be addressed early if international credibility is to be established. Second, that consolidation must involve both tax rises and spending cuts. Third, those tax rises should mainly focus on disincentivising certain potentially harmful substances (tobacco, carbon, alcohol) and on consumption, not on corporate profits or personal income. And, fourth, cuts must be socially equitable, not bearing down hardest on the poorest in society.
Labour likes to portray the Tories as friendless and isolated on the European scene so it was hardly surprising that Osborne was seen nodding vigorously in agreement throughout – except when Borg praised the euro. Under severe time constraints, Osborne’s own remarks were to the point: “The message could not be clearer – if you find yourself on the wrong road, you take the first available exit instead of carrying on. With the date of the general election increasingly likely to be after the beginning of the next financial year, that means we will need to make early in-year reductions in existing plans.”
Clearly signalling that the Conservatives want to be seen as serious about paying down the record £178 billion deficit, he outlined a number of measures that would be taken even before an emergency Tory budget that many expect within weeks of the election: “Programmes that represent poor value for money, excessive spending on things like advertising and consultants, spending on tax credits for people earning over £50,000, and spending on Child Trust Funds for better off families will all have to be cut during the financial year.”
The alternative, Osborne argued, would be worse: “There is a clear and present danger that the world will lose confidence in Britain’s economic policy. That would push mortgage rates up, more businesses would go bust and the recovery would be undermined.”
He said the biggest spending cuts, such as a pay freeze for five million public sector workers earning more than £18,000, would not be made until 2011, but other measures would take effect swiftly: “As he [Anders Borg] puts it so well, the longer one waits with the heavy lifting, the more difficult it becomes. I agree with him and an emerging international consensus that acting early helps to establish credibility, which will in turn help to keep interest rates lower for longer and support a strong recovery.” Osborne reiterated that he cannot even contemplate abolishing the 50p rate on the highest paid while at the same time asking many public sector workers to accept a pay freeze to protect their jobs.
Labour plans to raise spending by £31bn in the 2010-11 financial year, which begins in April, a month before the expected election. Osborne believes this 2% increase in real terms is not credible with a 12-13% fiscal deficit and a slow recovery. As the election approaches, the Conservatives appear ready to reveal bit-by-bit where some of the cuts will be found and welfare is an obvious place to start. Whether such economic rigour is necessarily an election winner is another matter, though: the Moderates lag some way behind their Social Democrat rivals in the Swedish opinion polls currently.
