Three months ago I wrote about the disastrous state of the public finances and, faced with Gordon Brown’s intransigence over the need for the scalpel, urged the Conservatives to get backing in order to push through the necessary policies to cut public spending. And that backing included the IMF. But three months is an extraordinarily long period in politics and even Gordon Brown has now conceded that spending will have to be constrained.
As he told the TUC a fortnight ago, he would “cut costs, cut inefficiencies, cut unnecessary programmes and cut lower priority budgets”, which begs the question as to why costs are so high, inefficiencies are endemic, unnecessary programmes are there in the first place and, given the fact that the public finances have been looking rocky for some years, lower priority budgets were ever given any priority at all. Even a casual perusal of the quite excellent work done by the UK Centre for the Measurement of Government Activity (UKCeMGA, to be found on the ONS website), shows that the performance of public sector productivity has been atrocious over the past decade. According to UKCeMGA’s data healthcare and education were two of the worst culprits. If such a performance were replicated by any private business in even a faintly competitive market it would have effectively signed its own death warrant.
And, lo, I read in today’s “Sunday Telegraph” that the Prime Minister has a plan “to bind this and future governments into years of severe spending cuts – and potential tax rises – to reduce the [public sector] deficit”. Leaving aside the fact that Governments cannot bind their successors, this indeed is a Damascene conversion for a man who has spent the last 5 years (or so) chanting about Labour’s “investment” in public services versus “Tory spending cuts”. Mr Brown will in future be arguing that it is “fair and responsible” to bring in a “Fiscal Responsibility Act” which, apparently, will probably be introduced in the next Parliamentary session. Well better the sinner that repenteth…
The task of getting the public finances into shape is formidable. In the April Budget, Chancellor Darling’s projections included the objective of balancing the “cyclically-adjusted current budget” by financial year 2017/18 (FY2017) and contained plans for fiscal tightening. Specific measures have been announced that will deliver about half of the projected tightening. Since April the public sector finances have, if anything, worsened as the economy has underperformed compared with the Budget economic forecast. Moreover, the wisdom of having so distant a target for balancing the budget has been questioned. But if a less distant is picked then clearly the tightening will have to be even more stringent. I calculated that, if a target of zero public borrowing by FY2015 is chosen for illustrative purposes, another £70-90bn of fiscal tightening would be required over the period FY2010 toFY2015. (The details can be found on www.arbuthnot.co.uk.) These numbers are simply eye-watering.
Given the expected scale of fiscal tightening over the next few years, there has to be the danger that the higher taxes and/or spending cuts will undermine the economy’s recovery – if not throwing it back into recession. But I take the view that the financial position is so dire that the most sensible objective would be to get the tightening over as quickly as possible and trust that the Bank of England could maintain overall spending power in the economy at a satisfactory level by keeping interest rates low, extending quantitative easing if necessary. The pound too will remain weak – thus aiding the all-too-necessary rebalancing of the economy from excess domestic expenditure and large current account deficits to a more sustainable domestic sector and a more balanced external sector.
