With the election campaign properly under way and the polls having generally leaned in favour of a Conservative government in recent days, questions are being asked about whether a speedier tightening in fiscal policy - as advocated by the Conservatives - could endanger the fragile economic recovery.
Fortunately, history provides us with two relatively recent episodes of fiscal consolidation - both overseen by Conservative governments - which could help shed light on the impact that stricter policy might have on economic growth. The first was effected in the 1981 Budget, when then Chancellor Geoffrey Howe decided to raise taxes aggressively at the tail end of a deep recession. So austere was the Treasury's Budget that it prompted the famous letter in which more than 300 economists expressed their reservations that, "present politics will deepen the depression".
Then there was the fiscal tightening of the mid- to late-1990s under the Chancellorship of Kenneth Clarke - continued under Gordon Brown into the first two years of Labour's new term in office. This was different to the early 1980s in two ways: it was focused more on spending restraint than tax rises (European Commission and IMF research suggest spending cuts lead to longer-lasting budgetary improvements than tax increases) and the consolidation was much more prolonged than that of the 1981 Budget.
The efficacy of these deficit reductions can be judged by examining how the cyclically-adjusted primary budget deficit changed over time. In 1979 this measure of the deficit stood at about 2 per cent of potential GDP, before moving to a more than 2 per cent surplus in 1982. Looking at the more recent tightening, in the immediate aftermath of the 1992 ERM crisis the deficit had risen to over 4 per cent. From 1993 it began to shrink, evolving into a surplus by 1997 which rose above 3 per cent of potential GDP by the end of the decade.
How did overall economic growth perform following these big policy shifts? The answer is exceptionally well. While output continued to contract in the first quarter of 1981, it grew at an average rate of close to 3 per cent in 1982 and 1983. As for the 1990s tightening, the economy grew at a blistering average rate of 3.5 per cent annually during the period of budgetary improvement.
David Fuller's view Background economic factors in the early 1980s and early 1990s were not comparable with today, particularly regarding budget deficits of 2 to 4 percent of GDP then, compared with probably 12 percent today and a forecast that total sovereign debt could reach 89 percent GDP by the end of the next parliament. Nevertheless the principle is the same.
The UK does not need more tax hikes. There have been too many of these already, hurting the poor via petrol taxes and VAT, while income and payroll taxes are driving businesses and entrepreneurs from the UK. The income tax hikes may seem like just deserts to some but were political and are revenue negative for the Exchequer.
The UK does need spending cuts, and soon, for the economy to approach its growth potential in future.