Budgets the Tories Must Choose from ; CITY COMMENT

Article excerpt

THOUGH Tory leader David Cameron and shadow chancellor George Osborne seem increasingly confused about what to do when in power to tackle the public sector deficit and associated mountain of debt, there is no reason for the rest of us to be in the dark. It is obvious that if they have the chance they will do what previous Tory governments have done.

For that, they need to adopt one of two models. The first is Geoffrey Howe's Budget of 1981, the second the 1993 Budgets (there were two) of Norman Lamont and his successor Ken Clarke. The first was brutal in its cuts and disastrous for the economy at the time. The second was more subtle and laid the foundation for the growth which the Labour Government was lucky enough to inherit.

Until quite recently Osborne and his advisers looked to model themselves on the 1981 Howe -- first because there is something deeply ingrained in the Tory psyche which wants to take a scythe to those ranks of social workers, equality advisers and health and safety professionals but also because they believed that it was Howe's cutting public spending and put up taxes in the teeth of recession which laid the foundation for later growth. To recap -- and thanks here to PricewaterhouseCoopers' Book of Modern Budgets for the details -- in the 12 months before Howe's Budget, unemployment had risen by more than one million, GDP had dropped by 2.5%, manufacturing output plunged by 9% and the public sector deficit, which had been forecast at Pounds 8.5 billion, came in at Pounds 13.5 billion. Howe froze personal allowances, created a new tax on North Sea Oil, imposed a Pounds 400 million windfall tax on banks and sought to offset the massive fiscal squeeze with a 2% cut in interest rates to 12%. Those were the days.

This is what Osborne is thought to have in mind when he talks about tough decisions. What he needs to remember though is that the economy dropped off a cliff after the Budget and it set off a summer of riots in London, Liverpool, Bristol and several other cities. The Tories also fell massively behind in the polls and would have been thrown out at the next election had not their popularity been transformed by the Falklands War the following year.

Ten years later and after the collapse of the Lawson boom, the public sector deficit ballooned to levels no one had seen before, and the economy once again plunged into recession. …