I've previously tried to convinced you that we should aim to have public expenditure in 2010/11 some £95bn or more less than the government's current plans. I sense that few of you were really convinced. So I want to express the matter another way. Forget the niceties of fiscal management and complicated thoughts about sovereign risk. Just concentrate on an idea I hope is politically familiar: the role of the State.
Click on the graph above to see it full size. The government's current expenditure projections imply a truly astonishing rise in the role of the State over the next couple of years. Even on its own figures in the pre-Budget Report (PBR) in November (see Chart B.2 on p209 here), and setting aside the support provided to banks, the government intends to raise public expenditure from 41% of the economy in 2007/8 to 44% in 2009/10. This compares with 36% in 1999/2000 - a rise of 22% in the size of the state, relative to the economy, in just ten years. But, of course, no-one believes those projections, because they were based on hopelessly optimistic growth forecasts.
So, let's instead take the average growth forecasts from the Treasury's list of "Forecasts for the UK economy". These are forecasters that the Treasry considers authoritative. Their forecasts imply that the economy will be some 5% smaller in 2011 than the government thought at the time of the PBR. They also think inflation will be a bit lower. Together, these differences imply that, on the government's planned expenditure, by 2011 the State will be spending about 47% of GDP - a rise of nearly 30% in the State's role in the economy since 1999/2000.
Finally (but by no means most pessimistically) we can consider the impact if the recession is slightly worse than the early 1980s - say, a 6%-7% recession. Let's set aside more deflationary scenarios than those other forecasters anticipate. My view is that a recession slightly worse than the early 1980s is now pretty much the best case, though I also believe it the most likely scenario. A fall of 10% in GDP, as projected by some more pessimistic forecasters, cannot altogether be ruled out - I won't even show you the implications of that, lest I seem a scaremonger (the other cases make my point adequately, but I mention the the 10% scenario to illustrate that I consider the scenarios I have quoted to be conservative). If there is a 6%-7% recession, that implies that the the economy will be some 8% smaller in 2011 than the government anticipated at the time of the PBR. That would imply that, on the government's planned expenditure, by 2011 the State will be spending about 52% of GDP - a rise of over 40% in the State's role in the economy since 1999/2000, and some 25% just since 2007/8!
This kind of explosion in the role of the State is an economic matter, but you must also see it as a matter of political philosophy. Do we really want the State to take the opportunity of recession to raise its role in the economy from an already-high 40% to over 50%? Are we really so frightened of the "Tory cuts" mantra that we are going to be frightened to challenge the government on fundamentally increasing the role of the State in the economy? This isn't about £5bn here or £2bn there. This is about the nature of our country: are we a country in which most economic activity is to be conducted by private persons making their own private transactions, or is most of the economy to be planned out by the State? Is our leadership really content to find itself in the position of opposing a £12bn tax cut but supporting a 25% increase in the relative size of the state in just three years?
