Sizing Up The Axe

TUESDAY, DECEMBER 09, 2008

Sizing Up The Axe

When it comes to the politics of fiscal crises, two months is a millenium. At the Tory Conference in October we were once again bemoaning Dave and George's unwillingness to contemplate public spending cuts to fund lower taxes. But today, Dave very nearly promised to do precisely that. He said:

"I can announce today that in order to keep spending at a responsible level and to ensure the quickest possible end to the recession and the strongest possible recovery, we will not match Labour’s new spending plans for 2010 and beyond. 

Only by taking this step can we ensure that the Government lives within its means and only by ensuring that Government lives within its means can we build the in the future."

Now that's more like it.

The next question is how much to cut?

Over the last decade, Labour's fiscal incontinence has inflated our public spending relative to the OECD average by about 4% of GDP (see chart above). So just to get back level with our immediate competitors - never mind China and India - we need to cut spending by a minimum of £50bn pa. Which is 8% of this year's total.

Unfortunately, since we suggested that £50bn target in October, our situation has got much worse. In particular, according to the Treasury, our economy has gapped down by 4%, reflecting the fact that some key growth sectors - eg financial services - have been incinerated. They are unlikely to rise again anytime soon.

So to take account of that, our cuts target is now more like £70-80bn pa (11-13%).

However you look at it, that is a shedload of cash. It is way bigger than our entire education budget, and getting on for what we spend on the NHS. But that's a measure of the massive damage Labour has inflicted on us.

Can it be done?

Well, clearly not all at once. And clearly, in an ideal world nobody would start from the pit of 70s style recession. But if we're ever going to rebuild that low tax, low debt economy that will be able to compete in the world and help create jobs wealth and opportunity for our people, we're going to have to find a way.

Of course, some people - such as Oliver Letwin - reckon you can't cut spending at all, and no government has ever succeeded. But actually that's not true - Callaghan's government cut it by 4% in real terms between 1976-77 and 1977-78. And crucially, he did so because we'd been introduced to TINA (accompanied on that occasion by her friend IMF).

We're pretty sure TINA is heading our way once again, and this time she's going to be really mad.

No more faffing around. We need to get ready for her.

Step one is to get real about just how much spending we need to cut.

Step two is to decide how we're going to do it. It can't all be done immediately, which is why we need those full fiscal rules we've blogged so often.

And step three is to decide what goes. We'll be blogging some suggestions over the next week or so.

MONDAY, DECEMBER 08, 2008

Servicing Gordo

The real picture is even worse

The Pre-Budget Statement showed us just how enormous Brown's credit card bill now is. Yet Labour commentators like to suggest we shouldn't freak because the pain can be pushed off into the far distant yonder.

Needless to say, that's total bilge. As we can immediately see by considering our prospective annual debt servicing burden.

First, there's the interest on our official government debt. According to Darling'sPre-Budget Report (PBR), that will increase from £30.8bn in 2008-09, up to £40bn in 2010-11. Assuming the same average interest rate applies thereafter, his debt projection implies interest payments increase to £51.5bn pa by 2013-14.

Second, there are the contractural payments under PFI contracts - debt servicing in all but name. According to the PBR, they will increase from £8.2bn this year, to £10.2bn in 2013-14.

And third, there are the payments of those unfunded public service pensions - a huge undeclared debt which is generating a rapidly escalating annual payment bill. The PBR shows these pension payments increase from £22bn this year, to £24.1bn in 2010-11, and we estimate he's building in a further increase to £27bn - £28bn pa by 2013-14.

So adding these three debt servicing streams together, we are looking at a cost increase from around £60bn this year to around £90bn in 2013-14 - a whopping 50% jump in just five years.

And just to put that in perspective, to pay for an extra £30bn pa of debt servicing will require an increase of 6p in the standard rate of income tax.

But even worse than that, these numbers are based on Brown/Darling's highlyoptimistic PBR assumptions on economic growth. And they take no account of the debt issued to pay for bank bailouts. Factoring in more realistic assumptions cranks up the debt servicing numbers even more.

According to BOM's supercomputing fag packet, by 2013-14 merely servicingGordo's debt will be costing us well over £100bn pa. Or £4 grand pa for every single household in the country.

And you know the very worst bit?

The debt itself will still be growing. There is as yet no credible plan for reducing - or even stabilising - it.