Addressing the deficit

The dire state of government finances will be a key part of the macroeconomic policy debate for months - perhaps years - to come. Tom Witherow focuses on some of the fiscal measures flagged up by the Conservative Party during their conference in Manchester this week

This week’s Tory party conference has revealed many things, but perhaps the most direct impact will be their plan to cut the fiscal deficit. Their plans include:

* Bringing forward the increase of retirement age to 66 by a decade and regular increases after that; £13 billion saved pa.

* Maintenance of the 50% tax rate for top earners

* Child trust funds will be cut; $7 billion saved pa.

* Civil servants will suffer a pay freeze in 2010, noone will earn more than the PM (£197,000) and public sector pensions will be capped at £50,000; £7 billion saved pa

* Tax credits for those earning more than £50,000 would be scrapped

These measures will of course help, however, the flaw in the government’s plan is the possibility of Cameron repeating Japan’s mistake in the 1990s. If taxes are raised too quickly then we may end up ina double dip or W-shaped recession.

However, what may be far more damaging is the expected tax rises rather than the rises themselves. The Economist predicted that the deficit will probably (or hopefully) be reduced through reform of the civil service and the NHS. Thus taxes will not rise as much but outgoings should.