My post yesterday, proposing that we should not spend more, as a proportion of the economy, in 2010/11 than we did in 2004/5 - implying a £95bn reduction in 2010/11 plans - did not result in universal acclaim. My suggestion there was that the public would accept that, since the economy might only be as big in 2010/11 as it was in 2004/5, we should not spend more than in that year. My scheme was obviously an application of David Cameron's previous commitment that public expenditure should grow more slowly than the economy as a whole.
Let's try two other ways to think about matters:
- Even with only a 6%-7% recession, the economy in 2010/11 will be 10% smaller than was expected at the time of the pre-Budget report. So it would not seem unreasonable if 2010/11 public spending were 10% lower than planned at the time of the pre-Budget report. That implies a cut of £68bn versus those plans - or, to put matters another way, it implies that expenditure in 2010/11 should be about £6bn less than it was in 2008/9 - a £6bn absolute cut.
- Or try this: since we are going to have deflation, or at least precious little inflation between now and 2010/11, and since the economy is going to shrink considerably over that period, why would the public expect us to be spending any more in 2010/11 than was done in 2008/9? A freeze versus the 2008/9 budget would imply a reduction of £62bn in the 2010/11 plans.
The government wants to tell us that to make these cuts would be crazy in the face of the Depression. But that is because they want us to believe that expanding public expenditure is the only kind of fiscal policy possible. I, of course, have argued that the only true fiscal stimulus is a tax cut. Be that as it may, if we want to implement fiscal expansion - if, say, we want to borrow £100bn+ a year as the government plans - we could do that by cutting taxes versus a 2004/5 base (if you liked yesterday's proposal) or versus a 2008/9 base (if you prefer today's). We don't need to raise public spending to implement fiscal stimulus. We should not allow this depression to be used as an excuse for the government to raise the role of the state by expanding expenditure at a time when the economy contracts significantly.
