In the immediate aftermath of Monday's multi-layered pre-Budget report, attention mainly focused on who would win or lose from the various tax changes. Was Alistair Darling really out to soak the rich to pay for Labour's £20bn stimulus package? Or would those on taxable incomes between £20,000 and £40,000 find themselves paying more, too, once all the detail translated into concrete tax demands? Would the main VAT rate soar as high as 20% once the 13-month giveaway starting Monday is rescinded? Was whisky being clobbered unfairly?
In the immediate aftermath of Monday's multi-layered pre-Budget report, attention mainly focused on who would win or lose from the various tax changes. Was Alistair Darling really out to soak the rich to pay for Labour's £20bn stimulus package? Or would those on taxable incomes between £20,000 and £40,000 find themselves paying more, too, once all the detail translated into concrete tax demands? Would the main VAT rate soar as high as 20% once the 13-month giveaway starting Monday is rescinded? Was whisky being clobbered unfairly?
Well, that hit on our national dram was a computational error, now corrected. The VAT scare, triggered by the wrong draft of an impact assessment appearing briefly on the Treasury website, has been squashed by a prime ministerial assurance that it won't ever happen on his watch. And the alleged hit on middle-income groups turns on how you interpret the consequences of that temporary hike in personal allowances, introduced last May to defuse the 10p tax rate rammy, now being made permanent. Compared with where they stood at the start of this financial year, there is no tax bombshell awaiting them in 2011. Most will find themselves a bit better off.
As for squeezing the rich till the pips squeak, it does transpire that those falling into two narrow bands of income above £100,000 face a marginal tax rate of nearly 60%. But I'm sure they won't be short of advice about how to avoid paying that. Indeed, there are plenty of commentators queuing up to suggest that the new 45p higher tax rate on incomes over £150,000 may end up as a token gesture, bringing in no more than fiscal small change. The real story of this package isn't tax at all. As I suggested at the end of my piece on Tuesday, the decisive hit in the years ahead, under these plans, will be on levels of public spending.
After a decade of well-above-inflation increases in UK public expenditure, the brakes are about to be slammed on big time. Whoever wins the Westminister election in 2010 or the next Holyrood election a year later is going to find themselves back in the kind of hair-shirted spending settlement New Labour inflicted on itself back in 1997. As ever, the Institute for Fiscal Studies has come up with the definitive analysis. Once the Darling stimulus has been dispensed, this year and next, the net tax increase over the following three years (2010/11 to 2012/13) will total just £3.6bn. But the net spending squeeze across the UK over that same three-year period could, the IFS calculates, add up to a whopping £38bn, an order of magnitude greater.
That's how the UK government plans to claw its way back to fiscal stability by 2015. Most of the shock increases in public-sector net borrowing revealed on Monday - now forecast to peak at £118bn next year and double the national debt by 2014 - are down to what IFS director Robert Chote calls "a permanent £60bn hole in the capacity of the economy", punched out of it by a loss of 4% of GDP, and the resultant fall in tax revenues and rises in social security spending. That's the stark scale of the legacy this global credit crunch and the resultant recession will leave us with thereafter.
I suspect most politicians in Westminster and at Holyrood have yet to grasp the full significance of this aspect of the Darling package. When Finance Secretary John Swinney reported to MSPs on Wednesday, he was focused on how Scotland's SNP minority administration will cope with Scotland's Barnett-consequential share of two decisions the Chancellor announced on Monday. The first is positive. Mr Swinney can fast-track £260m of capital expenditure this year and next, Scotland's share of the £3bn of capital spending Mr Darling has brought forward from 2010/11 as part of his £20bn stimulus package. The other has much less pleasant implications.
Having exceeded the Gershorn targets for efficiency savings between 2004 and 2007, the Chancellor is planning to squeeze an additional £5bn in value-for-money savings from UK public expenditure in 2010/11. Detailed departmental targets will be announced in next year's budget. But again there will be Barnett consequentials. A £129m hit is already expected from changes in the NHS capital budget south of the border. More will come from Scotland's share of that top-slicing of £5bn in additional savings from the overall UK budget. Mr Swinney talked of an overall cut in Scottish spending of up to £500m. He described it as "the biggest cut in Scottish spending since devolution". I suspect he may be under-estimating its true scale.
For there is one other aspect to the Treasury's new spending plans that will cut even deeper. Apart from the £5bn of annual efficiency savings in 2010/11, the UK government is planning for total spending to grow by just 1.1% in real terms from April 2011 through to March 2014. That, suggests the IFS, would reduce total spending by 2.5% of national income over that three-year period, or some £37bn in today's money. The institute was quick to remind us that, back in the 2005 election campaign, Labour ran a poster shouting out: "Warning: the Tories will cut £35bn from public services." And the politician who is now looking for a £37bn squeeze in public spending from 2011 onwards, Alistair Darling, warned at the time that such cuts from Labour's spending plans would be "so large they could only be found from cutting deep into front-line services, including schools, hospitals and the police". If that was the case in 2005, what will have changed by 2011?
On top of the £500m cut Mr Swinney is already alarmed about, Scotland's share of the pain of restricting overall UK spending growth to 1.1% a year could amount to another £3bn cut between 2011 and 2014, or £1bn a year. And if the current stimulus fails to deliver all the Chancellor is looking for in terms of a short-lived recession and resumed growth by July of next year, then these spending curbs might have to be even greater. We can, I suspect, begin to see some of the core battleground on which both the UK and Scottish elections are going to be fought.
Once the penny drops, all the opposition parties will relish rubbing Labour's nose in the fate of public expenditure after all the boom spending years. But these realities face them, too. Spiralling borrowing and national debt are inevitable, whoever is in power in the coming decade. They will all have to adopt unpleasant remedies to set the ship of state upright again. Magic wands are in very short supply.
