It's worse than we thought Guv !
Britain's public finances are deteriorating faster than anyone, Tories, Labour or LibDems, expected. The National Debt has balooned to £650 billion from £315 billion in 2001/2002. And the revelation that funding this debt is now practically equal to the annual defence budget ought to be pause for some sober reflection.
What's even more worrying is that this burden is becoming more expensive because the threat of inflation - and the higher interest rates that come with it - is untamed and will remain so for the forseeable future. The prices of oil, food and other commodities are driven by surplus global demand and cannot be reduced with tighter British monetary policy. Which leads me to the conclusion that it is only in the public sector where there is scope for compensatory deflation. So efficiency reforms and eventual tax cuts have to be on the agenda, like it or not. Leaving aside the debate on the Laffer Curve which Peter Franklin touched on this morning, everyone should acknowledge the enormous economic cost in lost growth from increased government expenditure - about £14 billion since 2000 according to the European Central Bank. The ECB report (hardly the Taxpayer's Alliance!) shows that a 1 percentage point increase in government spending as a share of gross domestic product reduces growth by 0.13 points, while a 1 point increase in tax, compared with GDP, reduces growth by 0.12 points.
These are very similar figures to a seminal paper by Professor David B. Smith a few years ago, which I've uploaded here, Download david_smith_2.pdf "The Effects of Public Spending and Taxes on Economic Growth" for your further interest. There, the calculation for lost output from increased government expenditure was 62% of GDP from 1960 to 2003.
So what can we do?
The faintly left-leaning Institute for Fiscal Studies advocated a couple of weeks ago raising taxes by £8 billion to plug the gap. Well maybe there's a vocal constituency out there of small and medium sized businesses clamouring for the continuation of Brown's spending plans and higher taxes, but I can't hear it. And not everyone has confidence in the IFS's static calculations that arguably underestimate the rapid crowding-out of private investment, household consumption and net exports which are so critical to growth in the private sector.
An honest analysis would suggest the public sector has become obese. And without an Atkins diet of budgetary restraint and wage discipline and a privatisation and outsourcing programme to shed at least a few pounds of fat, the British economy just might be heading for a massive coronary.
It's high time to get real on the economy.
Preparing for the worst, is always better than doing nothing and hoping for the best.
