Andrew Lilico is Policy Exchange's Chief Economist.
Policy
Exchange is currently engaged in a major programme on public spending. Our first report considered the scale of the
challenge, demonstrating that there is currently a huge surge in public
spending (up £120bn in just three years) and arguing that there would need to
be cuts of £55-£65bn from 2010.
A week or
so after our report came out, the public spending debate blew up following
Andrew Lansley’s comments that the 2009 Budget already implied cuts of 10% in
departmental expenditure limits if NHS spending is ring-fenced. Gordon Brown seized on these remarks,
claiming that they indicated an intention by the Conservatives to cut all
spending by 10% in contrast to what he claimed was Labour’s intention to keep
raising spending each year. Subsequent
press commentary has exposed the blatant untruth at the heart of Brown’s
claim. For Labour’s own Budget scheduled
a halving in the capital spending budget and cuts in departmental expenditure
limits of 7% from 2011-2014.
But in fact
much the largest cuts announced in the Budget have had almost no publicity at
all. Look at paragraph 2.81, p35 of the 2009 Budget.
This states:
This Budget puts the public finances on a path to achieve a cyclically-adjusted current balance in 2017-18. The cyclically-adjusted current deficit falls from 6.7 per cent in 2009-10 to 3.2 per cent of GDP in 2013-14, an average improvement of over 0.8 per cent a year... A further adjustment of 0.8 per cent of GDP a year from 2014-15 would eliminate the deficit on the cyclically-adjusted current budget by 2017-18.
What this
says is that from 2014-5 to 2017-18, the 2009 Budget schedules fiscal
tightening (tax rises or spending cuts) of 3.2% of GDP, that is to say, a
little under £50bn. Because this is
about addressing a structural
deficit, it won’t be corrected by the economy returning to healthy growth –
this 3.2% is the deficit even when the economy is growing well.
Does this
mean £50bn in tax rises or in spending cuts?
Well, the 2009 Budget contains explicit fiscal tightening made up of 80%
spending cuts and 20% tax rises. This is
inevitable – historical and international experience suggests that it is
impossible to achieve fiscal tightening on remotely the scale required by
raising taxes (raising taxes causes the economy to fall deeper into recession
and so revenues fall and so the deficit does not fall by nearly so much as the
tax rises). Thus we can reasonably
assume that £50bn in fiscal tightening will be made up, as with the other
fiscal tightening in the Budget, of about 80% spending cuts and 20% tax
rises. In other words, the Budget
schedules about £40bn in spending cuts, Labour cuts of £40bn, from 2014-2018.
I emphasize
again that these £40bn of spending cuts are in
addition to the 7% cuts in departmental expenditure limits already being
discussed (amounting to about £25bn) and the halving in capital spending
(amounting to about £20bn). If
Conservatives are serious about spending less than Labour, we need to work out
how to cut spending by more than
£40bn, over-and-above the spending cuts of 7% in DELs and the halving of
capital spending. And the reality is
that, with the ratings agencies having placed the UK on notice that our AAA
rating will be under threat if a credible fiscal consolidation plan is not
introduced by the next government, we will not be able to wait until 2014
before doing it.
