Cuts – The Sums
There has been a curious reluctance of politicians to offer a joined up explanation of the task ahead. It may be daunting but it is doable.
Using current estimates total government expenditure this year is expected to be around £650 billion. Total revenue is projected at somewhere under £500 billion, leaving a gap around £160 billion. That means there is a 23% shortfall currently covered by borrowing.
The Government has to put this right. It can cut expenditure by 23%, or it can cut less but increase taxes to cover the difference. It has to be careful to calculate net savings as unemployment costs increase if the cuts put people out of work. However it must be stressed that if you put private sector people out of work you introduce a new cost with their unemployment benefit. But if you put public sector workers onto the dole, the benefit is in most cases a lot less than their salary and therefore there is a net saving. This means that the public sector is the place for a major cull of numbers and actual government functions. In the end there will be a leaner and keener economy.
Benefits are thought by many to be sacrosanct and for those who need them they should be. For those who do not need them they should be stopped. There is no point paying the state old age pension to people including civil servants who already have occupational pensions sufficient to give them a comfortable retirement. It would make sense to pay the OAP in full up to a total retirement income of average earnings and then fade it down from that point. Likewise child allowances and so on, including the winter fuel allowance. By protecting those with need and turning away from those who do not, a lot can be done.
Next we need to consider tax rates. In relation to our expectations of service provision, income tax and vat are both too low. When Thatcher left office in 1990 the basic rate of income tax was 25%. Hers was a low tax, low spend policy, but her governments knew that there had to be enough revenue to pay the bills. Whilst there has been a constant increase in spending over the years we have tended to expect lower taxes as well. The sums do not add up as we can see. To avoid cuts bearing all the weight of the adjustment we may have to increase basic rates of income tax and vat. By taking the lowest paid out of tax there is scope to do this. It will cause some discomfort but not real hardship.
Finally there is economic growth. This is hoped for, but may be delayed because of spending cuts here and in all the indebted countries of Europe. We cannot rely on this potential growth playing any part in the reduction of the fiscal deficit. We might just allow ourselves to look to it to generate budget surpluses.
If we can generate surpluses after paying all the interest each year on the national debt at its current level, (projected to be just short of £0.8 trillion at the end of this year) even with a huge surplus of of 15% of current levels of income (ie £75 billion annually), it will take ten years to pay off the balance so far accumulated. You can get better economic growth, increase taxes or cut more to shorten the timescale or extend the repayment years to ease the pain, but one way or another the job has to be done. Inflation can help, but excessive inflation accelerates decline.
The challenge is just not just living within our means from now on, by closing the structural deficit of £150 billion plus. It is also to pay for and pay back in excess of £1 trillion which is where the total national debt is likely to wind up if we start right now. But the job is just doable now. If we wait it may not be. Then we will go bust.
The Labour theory, supported still by a dwindling number of professional economists, that economic recovery can be bought on borrowed money not only overlooks the relatively straightforward arithmetic but also the ever rising cost of the increasing pile of national debt, which becomes an unmanageable burden on the entire economy, paving the route from recession to depression to decline.