For obvious reasons, there is currently a debate about how to rectify the UK's public finances. Apparently many people favour doing it mainly by tax rises; a few favour mainly public expenditure cuts; presumably almost everyone favours some combination. To me, however, the debate seems to be starting in the wrong place. As the economy grows, we raise public expenditure in real terms because, since we are richer, we can afford (and prefer) to spend more on health and education and defence and so on. As the economy grows there is also a process called "fiscal drag" which arises because of tax thresholds - and so we tend to raise tax thresholds, also.
Now, however, the economy is shrinking. So the very principles that suggested that before we should raise expenditure and tax thresholds now imply that we should cut expenditure and thresholds. I personally still maintain my forecast of 6%-7% shrinkage in the economy before it starts to grow again, but since most of the risks are on the downside and since even when it starts growing the economy may not grow as rapidly as it was doing in the recent past, it would be prudent to plan for the economy shrinking by 10%. Let's go for that. That would take the size of the economy back to its position some time in 2004. Let's suppose we reach that some time in 2010/11. So I propose that the startpoint for the debate over how to rectify public expenditure ought to be the public expenditure and tax system of 2004/5. That is to say, the first thing we should think about doing is cutting public expenditure (in real terms) for 2010/11 to its 2004/5 level and lowering tax thresholds to their 2004/5 levels, and then think about how we might vary the system from there. As a headline, that implies cutting total public expenditure from its planned 2010/11 levels by about £95bn (and the NHS England budget by £25bn). Furthermore, since the Conservative Party has rightly argued that Gordon Brown's expenditure plans at that point were extravagant, the debate should then be about how much further we should cut.
There would be analogous cuts in tax thresholds, raising tax revenues.
Remember that all this £95bn cut would do would be to restore us to spending the same amount, as a proportion of our economy, as we did in 2004/5. As I said, so far this is simply an application of the very principles that justify the raising of public expenditure as the economy grows - namely that there is a relationship between how rich we are and how much we want to spend. (Indeed, arguably this does not go far enough even as an application of this principle, since in wealth as opposed to income terms we will be far below our 2004/5 levels owing to lost share market values, lost housing values, lost purchasing power because of the drop in sterling, and so on.)
This would obviously not go far enough, because as often discussed, Gordon Brown's public expenditure plans at that stage were not sustainable. It would also not go far enough because we will have built up considerable additional debts between 2007/8 and 2010/11 which will need in due course to be paid off. But I think this would be enough for us to try to cope with in one go - if we can deliver these expenditure cuts (and tax threshold cuts) in time, we can then move on to debate what to do next.
[Something worth noting about the principle presented here is that it gives us a startpoint for what to cut. I cannot see why it would be unreasonable, if our economy is only going to be as big as it was in 2004/5, for NHS, education, defence, home affairs and so on to have the expenditure levels they had in 2004/5. That would seem to me to be the proper base from which we make further decisions. So, in Charlie Elphicke's terms, I suggest that £95bn is the amount was can cut "just like that", without needing to reform the public services significantly. It is only after we have made the £95bn of cuts that take us to the 2004/5 base that the interesting decisions begin.]
Note: The numbers come from calculations based on the Treasury's latest Public Expenditure Statistical Analysis, in the Public Expenditure Overview chapter. Table 1.2 on p14 gives the 2010/11 planned TME, in 2006/7 prices, as £605,800bn, versus £517,059bn in 2004/5 - £89bn more. At 2010/11 prices that equates to about £95bn. The NHS England 2010/11 budget at 2006/7 prices appears in Table 1.6 as £93,211bn, versus £70,188bn at 2004/5, a cut of £23bn in 2006/7 prices or about £25bn in 2010/11 prices.
