The sound and fury of Britain's election campaign is obscuring the lack of any substantial differences between the main parties on economic policy or on how to tackle a record budget deficit. Whoever is in power after a May 6 vote will need to push through dramatic fiscal tightening to bring Britain's debt down and so far details of how have been thin on the ground. The opposition Conservatives – ahead in the polls but not far enough to be confident of securing an overall majority in the next parliament – say they will cut debt faster than ruling Labor, though not by much. The sums involved are tiny in comparison to Britain's bloated debt and neither party has so far come clean on the scale of spending cuts or tax rises that analysts say will eventually be needed in order to cut a budget deficit that is running at over 11 percent of GDP. Overall, Labor has said it will bring the deficit down to 4 percent of GDP by 2014/15, a cut of some 90 billion pounds, while still protecting spending on health, schools, policing and overseas aid. It has so far identified only 11 billion pounds of “efficiency savings” each year from 2011 and has planned tax rises of around 19 billion pounds. The Conservatives say they would cut the budget deficit quicker than Labor while still maintaining increases for health and overseas aid but have so far only outlined taking just 6 billion pounds more out of the economy this year. This has provoked furious debate about whether such a move would endanger a fragile recovery but in reality it amounts to just 3.6 percent of this year's projected 163 billion pounds deficit. What is more, the Conservative pledge to partially reverse Labor's planned payroll tax increase will cost a good chunk of the initial savings they have proposed. The only other clue to the Conservatives' ambition is a pledge to eliminate the bulk of the structural deficit – borrowing which is neither used to fund investment nor is the result of temporary weakness in the economy – by 2014/15. But Labor's plans already show it by and large doing this. “The Conservative manifesto did not tell us anything about their tax and spending plans we did not already know,” said Robert Chote, director of the Institute for Fiscal Studies. “In particular, it was no more explicit about how much more ambitious the Conservatives would be than the government in reducing the budget deficit over the medium term.” While there may be little to distinguish the two sets of plans, it is clear that significant tax rises or spending cuts will be required. Analysts say a fiscal tightening of some 5 percent of GDP, more than 60 billion pounds, might be needed. “People just don't understand how big the spending cuts will have to be, maybe even the politicians don't,” said one Treasury official. The Bank of England certainly does and that is a major reason why it is cautious about the economic outlook, suggesting that interest rates will stay low for some time. While spending on health, and under Labour education and policing, will be ring-fenced, other ministries could see their budgets slashed by between a fifth and quarter. That will have a big effect on jobs, government contracts and thus the economy. The government spends around 150 billion pounds a year on procuring goods and services, some 60 percent of the revenues of the FTSE-250 and Small Cap indices combined. “If we're pushed, we suspect that the UK equity market overall has a 10-15 percent sales exposure to UK government spending,” said Gareth Evans, strategist at Deutsche Bank. “For UK companies outside the FTSE-100, this exposure could be a lot greater given that it is these companies that tend to have government contracts.” While the prevailing view is that the economy could be in for severe pain, history reveals that big fiscal tightening is sometimes followed by big spurts in growth. In 1981, the Conservative government under Margaret Thatcher raised taxes by 2 percent of GDP, prompting 364 economists to write a letter saying the economy would not withstand the pain. Bank of England Governor Mervyn King, then an academic, was one of the signatories yet in 1982, the economy grew by 2.1 percent and in 1983, by 3.6 percent. Similarly, tight fiscal policy through the final years of the last Conservative administration and the first 2 years of the Labor government between 1995 and 1999 resulted in average annual GDP growth of 3.3 percent compared with the long-run average of 2.4 percent.
