Timing is of essence in politics. The best time to announce hard policy decisions is when the government is enjoying some goodwill. This is what Britain’s chancellor of the exchequer, George Osborne — the youngest person to hold this high office in over a hundred years — proceeded to do in his first budget, which lays down the economic policy framework of the new Conservative-Liberal Democrat coalition government. No one will deny that Mr Osborne was faced with an unenviable task. He had to ensure that Britain did not continue to spend at a level it can hardly afford. This meant an austerity drive, cuts in government spending, as well as a hike in taxes. The figures speak for themselves: the fiscal belt will be tightened by £113 billion in five years; taxes will rise by £29 billion; spending cuts will bring in £83 billion. The aim is to bring down the structural deficit from 10 per cent of the gross domestic product “to be in balance’’ over the next five years, by 2014-15. The last time such an ambitious project was undertaken in the British economy was in the late 1990s when the deficit reduction was 6.6 per cent over seven years. The pain of that process will be aggravated many times over by the current tightening of the fiscal position, which aims at a higher reduction in five years. One important fallout of this will be a restriction on economic activity and a decline in GDP growth.
Details of cuts in spending are yet to be announced. They will be known only in the autumn. On the tax side there are very few surprises: an increase in value-added tax from 17.5 per cent to 20 per cent starting from January 2011, increased capital gains tax and a new banking tax. It is worth noting that both parties that now form the government had assured voters during the election campaign that VAT would not be increased. The budget raises the spectre of unemployment in the public sector; and this loss will not be offset by any gain in the private sector. The fear is that the poor would be the worst hit by the cuts and middle classes will complain about higher taxes. Most people will look back in anger at Mr Osborne. But to be fair to him, his options were severely limited. Very hard decisions had to be taken and he chose, with good political reason, to strike with the hammer while the iron of the coalition government was hot after an election victory.