As you will know, George Osborne made a big speech on Friday. He got a lot of attention for telling us some "uncomfortable truths": the "money for nothing culture" must end; we must save more and invest more.
It all went down well in many Tory quarters.
Others were less impressed. Liam Halligan reckons that "the rhetoric is still too feeble and explicit policies barely exist".
So skipping the rhetoric, what did George actually promise to do?
- Financial regulation - "tougher regulation of bank lending in a way that dampens the credit cycle instead of amplifying it... for reforms to the failed tripartite system of financial supervision, returning more powers to the Bank of England to call time on excessive debt." We say good... but it needs a lot more detail. How do you tell a structural shift from a cycle? What constitutes excessive debt? Who decides?
- New business start-ups - government to put in cash either "through co-investment along the lines of the Prudential's new UK Companies Financing Fund, or a new Industrial and Commercial Finance Corporation - which became today's 3i". We say gulp! We really don't need a return visit from Wedgie Winner Picker.
- Cut Corporation tax rate - "already committed to reduce the headline rate from 28p to 25p by reducing complex reliefs and allowances, but we will need to go further if we are to keep pace with an increasingly competitive global economy". We say excellent.
- Cut tax deductibility of corporate interest payments - "Our corporate sector's excessive dependence on debt is deep rooted... our corporate tax system favours debt financing over equity. Interest costs are fully deductible with very limited restrictions, while the returns on equity receive little or no tax relief... But by reducing the tax breaks for debt we could potentially fund a significant reduction in the headline rate of corporation tax - a key determinant of our international competitiveness." We say wow! We agree that Brown caused immense damage to company financing though his pensions tax grab, and have blogged it several times (eg here). So in principle, a move to make equity financing cheaper is good. But given that interest is tax deductible in most other major economies, George would need tread very cautiously.
- Public spending - "We will come off Labour's unrealistic spending plans. We will bring about major reforms to the culture of Whitehall, putting the emphasis on value for money. And we will overhaul the way government spending is controlled by creating an Office of Budget Responsibility to act as a rod for the back of all future Chancellors". We say hurrah... but... we still need a bankable fiscal strategy, with quantified targets for getting spending down. And we have zero confidence that George would be any better at reforming Whitehall culture than Gordo was: he needs to chop entire activities.
- Public service reform - "whether it is Michael Gove's radical plans for Swedish-style school reforms, or the plans for real welfare reform that Theresa May and David Freud are developing, it is the Conservatives who are now driving the reform agenda. Reform is vital for its own sake - to deliver real improvements in services. But the fiscal crisis has created a new imperative." Spot on. With the money gone, radical reform is the only option. Schools and welfare for sure. But he unaccountably missed out the other key area - the NHS.
Pulling it all together, we can see he's on the right general track (except for picking winners that is). But with just a year to go before he takes over, we need a lot more detail.
In particular, we're still waiting for George to set out his medium term fiscal strategy. As we've blogged many times, our ballooning government debt makes it absolutely essential we retain the confidence of the international bond markets. Public spending is way above what we can now afford, and the markets want to know how George will bring it down. Rhetoric won't be enough -they are going to expect some chapter and verse.
And just so we all understand the scale of the task, the IMF says that if George is going to get our debt/GDP ratio back down to 60% - widely judged to be the maximum long-term sustainable level - fiscal policy will need to be tightened by around 4-5% of GDP. Which is a lorra lorra money - equivalent in today's terms to a spending cut of around £60-70bn pa (roughly 10%).
It's Big Scissors time alright. And I for one would be a lot more comfortable if I could be sure George had a coherent strategy for wielding them.
We'll be blogging further on this during the week.