The latest exchequer figures were even stronger than expected, showing a strong revival of tax revenues. Again, the Government is likely to beat its deficit target for the year, helped by a lower than expected financing cost on the national debt. Spending also remains generally under control. The figures provide further evidence of a revival in the economy. Tax revenues are up 13.4 per cent on last year and are 5.5 per cent ahead of target. Despite Budget reductions in income tax, the take here is still growing strongly ahead of target and almost 8 per cent ahead of last year, largely reflecting a pick-up in job creation. VAT revenues are rising strongly, due to a rise in consumer spending . The economy still has entrenched problems after the economic crisis; unemployment, while falling, is still high and debt levels are also a problem for many households. The national debt burden also remains high and the gap between spending and revenue has still to be completely closed.
Yet it would be churlish not to recognise the extraordinary turnaround which has left the economy and the public finances in a much more advanced stage of recovery than could have been anticipated. There are reasons for optimism and evidence of the underlying strength of the economy and its ability to deliver increased living standards in the years ahead, given a fair wind in terms of international economic trends. A few years of growth and low interest rates could deliver a significant dividend and laying the foundations for this steady progress needs to be the priority.
The outlines for the next Budget are not yet clear. Negotiations are under way with the EU in relation to the rules governing the leeway which the Government will have. The Spring economic statement, due towards the end of the month, will give the first clear indication of what the Government plans. A key priority must be not to do anything to upset the recovery that is now clearly underway. The old medical maxim is approporiate: “first , do no harm.”
The Government also needs to recognise that the reducing the deficit and the national debt burden remain vital. Uncertainties remain in the international growth outlook. Whatever the Government does, it needs not to upset the foundations for stability and growth for the next few years.
Political reality may dictate some spending increases and tax cuts on Budget day, the last opportunity to do this before the general election. But the priority must remain correcting the public finances and stabilising our position, for the simple reason that this strategy appears to be working. The return of growth brings challenges to the Government as it faces down rising demands. That said, they are easier problems to deal with than the dire choices faced by this Government and its predecessor in the midst of the crisis.