Who will be the first politician to tell the truth about Britain's public finances?

ConservativeHome today publishes a report entitled "Bankrupt Britain".  The report by Malcolm Offord - a City fund manager with 21 years experience and an adviser to the Centre for Social Justice - paints a devastating picture of the UK government's finances.  The Sunday Times covers the report - Britain faces £100bn cut in spending according to 'Bankrupt Britain' report - and you can read a full PDF here.

You do not have to accept Malcolm Offord's full analysis to agree that Labour will bequeath an appalling fiscal position.  At some point the Conservatives are going to have to face up to this situation and tell the British people what they will do to restore order.  Raise taxes?  Cut spending?  Both?  What is clear is that the current Tory position of growing spending more slowly will make little material difference.  Malcolm Offord says spending cuts of £100bn might be necessary.  That would be politically impossible but also economically impossible would be large increases in the tax burden.  Offord's paper also recommends significant welfare reform - more significant than currently proposed by David Freud, the very welcome new addition to David Cameron's government-in-waiting.  ConHome will be writing more about these welfare reform ideas tomorrow.  In terms of setting our their recovery programme, the Conservatives could wait until they are in office and have completed their Domesday reckoning.  But the levelling with the public should start now.  There can be no steady-as-she-goes.

Key findings from "Bankrupt Britain"

The characteristics of a sensible fiscal position: "As a rule of thumb, a well-run country would be characterised by government borrowing not exceeding 40% of GDP, a budget deficit of zero over the economic cycle (Gordon Brown’s now abandoned “golden rule”) but where public spending did not exceed tax receipts by more than 3% of GDP in any given year (the Maastricht Treaty rule)."

Britain is hurtling away from a sensible fiscal position: "In his Pre-Budget Report on 24th November 2008, the Chancellor Alastair Darling announced that he was planning a budget deficit of 8% of GDP in 2009-10... The Treasury does not plan on bringing the budget deficit down to the Maastricht target of 3% until 2014...  If we add the initial £77 billion of financial stability measures taken by the Treasury to deal with the fall-out from the recent banking crisis (Bail-Out I) this figure rises further to £973 billion – 65% of GDP."

Worse than the 1970s: "The biggest single annual budget deficit since 1970 was recorded in 1993-94 at 7.7% of GDP; compare and contrast this with the 2009-10 projection of 8% of GDP (which was calculated before the two Bank Bail-Outs and the rapid deterioration of the economy in the last three months)."

Britain is haemorrhaging tax revenues: "Tax receipts are now in free fall. To put this in context, in their peak year of 2007-08, tax receipts from the financial and housing sectors alone combined to contribute £60 billion to the Treasury. The Chancellor’s forecast that tax receipts in the worst forecast recession since the War will fall only by £10 billion is likely to be unrealistic. For reference, tax receipts fell by 6.4% of GDP (£94 billion in today’s money) in the last boom-to-bust cycle from 1985 to 1994... "City bonuses have been slashed, financial sector and company profits are collapsing, the property market has stalled, capital gains are non-existent, savings rates have slumped, VAT has been reduced, the price for North Sea oil has fallen – and the list goes on. HMRC must be haemorrhaging tax revenues."

The consequences of a 5% recession: "If we assume that in 2009-10, UK GDP falls by 5% overall in real terms, we think that “business as usual” levels of public spending and taxation would lead to national debt (on the Maastricht definition) rising to around 105% of GDP by 2012 and continuing to rise thereafter to 156% of GDP by 2020."

Public spending has soared over the last fifteen years: "The first point to note is that current Total Managed Expenditure (TME) of £623 billion has grown over 15 years by 5.4%pa from the equivalent figure in 1993/94 of £283 billion. This is a long-term trend of real spending ahead of inflation: if TME had grown over 15 years in line with actual inflation of 2.4%pa during that period, current TME would amount to £404 billion. On that basis, we have increased real spending by £219 billion over the last 15 years."

Tim Montgomerie

Comments

[David Belchamber]

We cannot wait for a Domesday audit of the country's economic state of play. We must have it asap to prepare the public now - while the authors of our misfortune are still in office - for the enormity of the task ahead.

Tim, is there any chance of getting some real stats from CCHQ (with like for like comparisons against 1997)? e.g.

* total of people who are able to work who are not doing so (i.e. not just the official unemployment figures)
* an index that shows inflation as it actually affects ordinary people (last year this was above 10% but the CPI was about half that).
* what government debt actually is as a percentage of GDP (i.e. bring in the off-balance sheet items that best accountancy practice would insist putting on the balance sheet).

Other contributors will no doubt add to this list (what about aggregating personal IT and the NI contributions - they are both a tax?).

In opposition we are constantly shooting too low and it is better to get to the truth now rather than find out when we get into government.

Anyway, if we could show the public quite how much Brown has deceived us, we might be able to bring pressure on him to hold an earlier election.

[Oberon Houston]

Although many Woolworths staff etc., will completely disagree, whilst things are indeed a mess, the effects haven't fully filtered through to many people. Politically it will be interesting to see 'deep cuts in public services' under Brown. Suspect that Brown is mentally incapable of accepting that need and would rather allow debt to climb. Its 1977 all over again.

[Oberon Houston]

... sorry got caught between two thoughts, what I meant to muse on was at what point will the electorate accept cuts? They are so used to spend spend spend, politically the timing of the message is important.

[Tim Montgomerie]

I'll talk to CCHQ tmrw David and get back to you. This is the most important ConHome post for some time. It marks the beginning of a big discussion on the need for openness about the seriousness of the situation and what needs to be done...

[expatinsingapore]

Interesting report. Of course Offord is completely wrong when we writes that raising taxes will result in higher revenues- as well as writing that this "shouldn't" lead to high earners leaving the UK.

Wanna bet?

[Tim Montgomerie]

Agreed expatinsingapore. Appreciably higher taxes will only depress the growth we need to get us out of this mess. It's a good report but I don't sign up to all of it.

PS There must also be a worry that the recession will be deeper than 5% meaning an even bigger black hole :-(

[Adam]

I can't see our leadership coming out and saying that we wil need to cut spending or increase taxes - they are too timid for that. They have only recently got away from matching labour's pre credit crunch spending plans!

[Lindsay Jenkins]

So Britain plc is a sell.

And that accords with friends and family who have either just left for foreign parts or are planning to do so.

In particular how can anyone with a young family give them a good education and a decent life in high tax, give away Britain. Many of the brightest and best will leave.

The revolutionary changes needed now, as highlighted by this report, are likely to be beyond any current leading politician.

[christina Speight]

For heavens sake! Some of us here for nearly a year now have warned of this moment and have continually said that if drastic public expenditure cuts are not made soon we will forced to make cuts of an even more drastic scale later. It's later than you think. "Later" is now!

It's not petty savings we've got to make - it's wholesale slashing. This will fall to the Tory party to carry out and as half the party and almost all the rest of the electorate are still not awake it will bew hugely unpopular. Unemployment will soar and rtge economy will collapse. We've fiddled while Rome has burned.

Which makes it all the more astonishing that the most perspicacious Tory MP has been ignored for appointment by the Cameron-Osborne team - Michael Fallon. His article in the S. Telegraph today spells it out exactly and shows what must be done NOW - later is too late.

[Anthony Scholefield]

I notice that the report does not mention two critical areas to which the leadership and its new spokesman Kenneth Clarke are particularly wedded.
First, Blair has promised huge net increases in Britain's budgetspayments to the EU . The quid pro quo for this was supposed and non-existent reforms.These will kick in next year,amount to several billion and are dead money.This is of course in addition to the billions and billion already wasted on EU membership.
Present policy is to fight for reform from within and has never achieved a single cent in saving.
Second ,the whole Tory heirachy and its media support has continued to insist that Britain must accept further immigration as well as temporary labour migration from within the EU. They base this on misunderstood Ricardian economics of comparative advantage, mixing up free trade with free movement of the factors of production.
In fact ,immigrant labour is a colossal cost as it requires capital expenditure to support it in industry,infrastructure,health,education.At a rough guess around 30% of net British capital expenditure should be going to support immigrants if the capital ratios of the whole population is to be maintained. In fact,this is not done and the politicians accept immigrants living a non-British lower standard of living as well as a deterioration in the capital and social infrastructure of the rest of the population. It is called impoverishment.
If immigration was stopped and Britain withdrew from the EU,there are potential massive savings.
Personally I dont think the leadership has even focused on these costs and are still in a cocoon dismissing them as the vapourings of 'right wing nutters'.

[expatinsingapore]

And it's relatively easy for a UK subject to live abroad and not pay UK taxes, while maintaining their nationality.

Whereas, the only way a US citizen (no matter where they live in the world) can get out of paying US taxes is by taking the rather extreme step of renouncing his citizenship.

What empirical or other studies has Offord provided to support his point that raising income taxes wont lead to a migration of high earners from the UK?

Indeed, over the past decade of Labour rule- despite not raising direct income taxes, there has been a significant outflow of Brits to parts abroad. One can only imagine how much larger this flow will become if income taxes are raised on the most productive members of society.

Furthermore, the beauty of the idea that higher taxes will lead to more revenue- is that becomes a virtuous cycle on its own. That is- when higher taxes leads to less revenue than expected, why that becomes justification for even higher taxes, etc etc etc.

[Tapestry]

Britain is not financially bankrupt.

But Britain is finished as a civilised country. The monetary issues are big but as nothing compared to the collapse in standards. Tens of thousands die in British hospitals every year of lack of cleaning staff. The Police are hopeless in the face of crime. Schools are teaching to standards that are an international embarrassment.

Britain is morally bankrupt.

The financial performance is a reflection of the loss of any kind of competence in government. Bring back competence and you will raise the performance level across the board.

They call it management. Conservatives are good at it.

[Lindsay Jenkins]

Tapestry, I dispute your 'Conservatives are good at it'. They used to be good at it.

Will the present leadership end our relationship with the EU (Anthony Scholefield is right - the cost is unbearable and getting worse by the second).

Will the present leadership unwind all the socialist tendrils wrapped around every part of our body politic? The NHS cries out for radical reform. Red tape smothers every part of our activities (much of it from the EU).

Guts and experience are needed. Where are they?

[ukipwebmaster]

Let's see.....Where we could find the money to make a dent in the public debt....?

[Tony Makara]

Its easy to be blinded by science and a plethora of figures often tends to deflect from seeing the real situation, as it is on the ground.

There are certainly areas in spending that can be reined in but we must always have one eye on what effects certain cuts are going to have, particularly in areas like health for example. Would a reduction is spending lead to the closure of mental health crisis teams or would cuts in welfare entitlement impact on children etc.

The fact is Britain has borrowed too much and those borrowing commitments have to be met, so how are we going to balance the books while at the same time reducing taxation and maintaining essential services?

Either way the room for manoeuvre afforded to an in-coming Conservative government is limited, move too quickly in cutting services and it might lead to public wrath and the return of a Labour government. The strategy for re-balancing the books has to be based on the long haul. Thirteen years of mismanagement can't be rolled back overnight, or even during a full term of government. The figures are frightening but looking for a quick-fix would be foolish.

[Simple Tory]

Tim,
I can't see anyone in our front bench team who has the guts to 'come out' and say it as it is.
This is a great time for you and Con Home to declare the new financial facts of life in Brown's Britain.
David Belchamber made a few good points above, the key thrust of which must be a massive reduction and wholesale simplification of our tax and welfare systems.
Finally, the £ multi-trillion liability of public sector pensions will sink us if the current depression does not. Boris made a half-hearted attempt to raise this issue last week - someone now needs to take up this batton.
How about it Tim?
Happy 2011 to you all!!!
S.T.

[Felicity Mountjoy]

With interest rates and exchange rates giving business a big break there must be some room for exporting and borrowing businesses to pay more tax?

[christina Speight]

Lindsay Jenkins asks "Guts and experience are needed. Where are they?" They are not in evidence in the Cameron-Osborne duopoly but they could make a start with Micael Fallon who has the gutrs and the realism needed.

Tapestry says we are not financially bankrupt. I'm sorry Tapestry but you're wrong. We are and we going to be forced to make the cuts some of us have been demanding continuously right here. The longer it's left to ferment and fester the worse it will be.

The Governor of the Bank of England says he regrets that it is savers that will have to pay for all this. Spare us your crocodile tears please. With the state of most savers reserves their savings have already been squandered and now the the rest of the ostrich-like feckless generation will have to suffer in turn.

[David Cooper]

In answer to the question introducing the thread: "John Redwood - and he has been a voice in the wilderness doing exactly that already, day after day." Only this morning he has coined slumpflation as a description for many of the key findings set out above. If JR was Shadow Chancellor and Michael Fallon Shadow Chief Secretary to the Treasury, thereby able to tell the truth to a wider audience from a more public platform, we would gain far more credibility as a government in waiting than we are from a policy of hedging bets by timidly backing Labour panic measures and equally timidly criticising them later when they have gone wrong.

[Patsy Sergeant]

I would agree with both 'Tapestry' @ 10.53 and Lindsay Jenkins @ 11.08.

I have seen, and heard examples of our 'moral bankruptcy', if not EVERYday certainly on a regular basis - a beach ball rolls out of a shop, and a couple walking by - 'Oh! lets have that!', pick it up and take it away!
- A young woman who's husband in the
armed forces, has her son in the local state primary school (at the moment), where chairs are thrown around, and recently another child put a thermometer into the Bunsen burner flame, resulting in several children receiving burns (from the explosion), the school REFUSED to say how these burns occurred, and just closed the science class for two months! Her son aged thirteen is even happy to go to a boarding school to get away from the present one!

While you have the BBC tolerating if not actually encouraging extremely questionable behaviour, ostensibly 'pushing at the boundaries' in order to flush out talent - is there no other way???? Messages will continue to percolate that - ANYTHING GOES!! and of course makes money!!!

[David Belchamber]

"It marks the beginning of a big discussion on the need for openness about the seriousness of the situation and what needs to be done..."

I agree, Tim. If you can get CCHQ to come up with an objective statement of facts and figures, it will show us just how serious the situation really is.

Lindsay at 11.08 points at where we must be looking to effect economies and we will need a 1940 Churchill moment, which I believe the nation will accept - if we are told the stark facts about where we are after 12 years of Nulabour, on top of which we have had the sub-prime fiasco.

Things ain't good but there is so much waste in the system that they could start to get better quite quickly. The question is: is there a Churchill around at the moment?