The figures leaking daily from the Treasury point ever more clearly to the catastrophe in our path. Gordon Brown knows these figures but ignores the lot and refuses to cut expenditure now.
To start now with a purely theoretical ‘modest” cut of £30bn [‘modest’ - words change their meaning under Brown’s government!] would, two years down the line, mean £60bn less to repay and (say) £1.8bn less interest to pay on that borrowing. The sooner we start, the less severe will it be and the lower the costs of rolling over the vast debts once lenders see our determination to make ends meet.
That’s the tale behind the first posting below.
The second is ambivalent which seems to be turning out to be Jeremy Warner’s trademark. He dismisses the danger to the costs of borrowing without much discussion. It appears that the international money markets have given a cautious welcome to Tory plans and are continuing borrowing requests without raising the ante. If there is any backsliding this reticence would not last.
I am unhappy at what I see as Warner’s foolish optimism.
Christina
TELEGRAPH 17.9.09
1. Gordon Brown's 'costs of failure' will reach £256 billion
Social security payments will cost almost £200 billion in four years time, accounting for one pound in every four that the Government spends.
By James Kirkup, Political Correspondent
Combined with a debt interest bill of more than £63 billion, items Gordon Brown once called “the costs of failure” will absorb more than a third of all Government spending.
Leaked Treasury documents have revealed the Government’s own bleak forecasts for rising welfare payments and debt interest costs.
The figures, which were not revealed in this year’s Budget, show the scale of the damage that will done to the public finances by rising unemployment and the soaring national debt.
The papers show that the Treasury expects to pay out £193.4 billion on social security benefits in 2013/14. Paying interest on the Government’s outstanding debts will cost £63.4 billion.
Total Government spending in the same year will be £758.3 billion. Welfare and debt interest will be 33.8 per cent of that total.
Around 6 million people in Britain are estimated to claim some sort of employment-based benefits, and the figure is set to rise.
Official figures released on Wednesday showed that unemployment reached has 2.47 million, the highest since 1995. Most economists expect the total to peak at around 3 million early next year.
In his 2000 Budget, Mr Brown described money spent on debt and welfare as “the costs of failure” and lauded Labour’s record in reducing those payments.
He said: "Our promise was to reduce the costs of failure – the bills for unemployment and debt interest – in order to reallocate money to the key public services."
Now, Mr Brown’s own figures reveal how those costs are set to grow dramatically.
Already the largest single item in the budget, by 2013/14 spending on social security will dwarf every other item of Government expenditure.
For example in 2010/11, total spending on the NHS in England will be £107 billion.
Total spending on the Ministry of Defence will be £36.7 billion.
The welfare bill will also absorb more money than every worker in the country pays the state in income tax. In 2009/10, the Treasury is expecting to take in £140.5 billion in gross income tax receipts.
The steep rises in spending on those items will contribute to a sharp squeeze on budgets elsewhere in Whitehall. Governments have little control over how much they spend on welfare and almost no say over how much interest they pay on their debts.
Between April 2011 and March 2014, total social security spending will grow by 4.4 per cent in real terms. And debt interest payments will balloon by 112 per cent.
By contrast, the “departmental expenditure limit” – which sets out the total envelope for Whitehall departments – will fall by 9.28 per cent in real terms.
Matthew Elliott, Chief Executive of the TaxPayers’ Alliance, said the figures show the "dire reality" of the public finances.
He said: "If even the Government, who are not known for their accurate forecasts of public spending, are expecting to see such massive social security and debt bills years down the line, then things are really bad. Such massive bills would place an unsustainable burden on taxpayers, which would hobble the economy when it should be growing out the recession."
2. Growth holds the key to reversing Britain's fiscal ruination
The truth will always out in the end. Thanks to a leak of confidential Treasury papers to George Osborne, the shadow chancellor, we now know that the Government is indeed going to have to cut departmental spending sharply over the next four years to stay within the parameters it has set for the public finances.
By Jeremy Warner, Assistant Editor
Mr Osborne's "scoop" confirms what everyone already essentially knew – that the Prime Minister's attempt to frame the political debate on public spending as "Labour investment versus Conservative cuts", was at best disingenuous or even, as Mr Osborne suggested on Wednesday, an outright lie.
As it now transpires, the Government's refusal to accept the need for cuts was not so much a case of being in denial as a deliberate attempt to mislead the electorate.
As if in anticipation of this "outing", the Government has been gently tip-toeing away from its former position, but even after the Prime Minister's use of the "C" word at the TUC annual conference this week, ministers have been unable to admit publicly the brutal reality of what they already know has to be done.
The Treasury papers finally lift the lid on Labour's dirty secret. We've known since the last Budget the broad outline of the Government's plans for public spending up until 2014. Capital investment was to be cut sharply, but current spending – which is the great bulk of the total – was to keep growing in real terms at an average of 0.7pc a year.
What was not known was how this growth in public spending broke down. The confidential papers show that it is all used up and then some in meeting the burgeoning costs of social security payments and interest on ever more mountainous public debt.
Departmental spending is, meanwhile, going to have to fall by a cumulative total of 9.3pc in real terms over the next four years to compensate.
The glee with which the Tories leapt on this unpalatable and until now undisclosed detail is understandable. The big lie over spending cuts is finally exposed. Yet they have also opened a Pandora's box. Mr Osborne has already condemned the Government's overall spending plans as unaffordable.
He's proposing a much swifter fiscal squeeze, or consolidation, than the Government, though he hasn't been clear on whether he intends to go beyond the 3pc of GDP envisaged by the Treasury for the next four years as a whole.
Yet if Labour needs to cut departmental spending by nearly 10pc to achieve a fiscal consolidation of as little as 3pc, then the Tories may have to cut further still for the bigger squeeze they aspire to. An already extreme political challenge is transformed into an even tougher one.
As ever, the politics of the debate on the public finances are a good sight easier to deconstruct than the economics. Everyone accepts there needs to be some sort of a squeeze. Without action, the nation would lose its AAA credit rating, and the Government would struggle to finance the deficit. Instead, the political differences are over timing, size and mix, or the balance between tax rises and spending cuts.
By targeting cuts, the Tories mine a rich seam of public discontent with an apparently overstaffed, interfering, over-protected and bloated public sector.
By pretending that we can carry on essentially as we are, the Government meanwhile plays to its traditional electoral support as well as the growing suspicion that some of Britain's Continental neighbours, with their even bigger public sectors, seem to have got their economic models more right than the UK.
By common agreement, the only lasting solution to the road crash in the public finances is renewed economic growth. The great bulk of the deterioration is caused by the recession, which has collapsed tax revenues, particularly from the City, and led to explosive growth in benefit costs. The faster growth comes back, the faster this particular part of the deficit can be corrected.
Yet even when growth returns, a still considerable "structural deficit" – the result of years of Labour overspending – remains. The economic debate thus resolves around, first, whether imposing the fiscal squeeze more immediately and aggressively than the Government proposes would snuff out the recovery and therefore prove self-defeating, and, second, how to address the longer-term structural deficit.
In pressing the case for immediate action, the Conservatives point to a key precedent. Geoffrey Howe did it into the teeth of the deep recession of the early 1980s, and despite the protests of 365 eminent economists who wrote to The Times accusing him of economic illiteracy, it seemed to work. Together with the supply-side reforms of the same period, it set the scene for an economic renaissance.
Less clear is that it would work this time around. Contractions caused by financial crises tend to be deeper and longer than more conventional recessions. And because downturns resulting from an excess of credit are inevitably accompanied by widespread deleveraging until households and businesses again feel financially secure, monetary action is going to have less traction than normal. A self-sustaining recovery may therefore require a longer application of fiscal stimulus than would traditionally be thought wise.
Can Britain afford it, or are we heading for national bankruptcy if the country sticks with Labour's plans? Both the projected size of the deficit and the scale of the growth in national debt are jaw-dropping – worse than any other G20 country. Even so, there are a number of reasons for believing things are still just about under control.
First, there is no obvious rebellion in markets. Standard & Poor's has sounded a warning, but the other two main rating agencies have reaffirmed Britain's AAA credit rating. Most credible watchdogs, such as the Institute for Fiscal Studies and the National Institute of Economic and Social Research, suggest that provided the Government sticks to its plans, the Treasury should avoid the calamity of compounding debt.
Paradoxically, the fiscal credibility of the Government's plans has been enhanced by the Osborne leak. The mystery of how the always suspected fiscal shortfall is paid for is now explained – the growth in departmental spending is to be reversed.
But most important of all, many of the assumptions on which the fiscal arithmetic is based are already starting to look overly cautious. The Government is almost certainly being too optimistic on its growth forecasts for the next four years, but it also seems to have been far too pessimistic in assuming a permanent 5pc reduction in output as a result of the financial crisis.
Few other countries were as cautious, and the US has built no supply-side adjustments into its forecasts at all. In the event, the City is coming roaring back and some other forms of tax revenue are also recovering faster than assumed. Obviously if there is a second leg to the recession, then all bets are off, but that's a different debate.
When push comes to shove, it seems unlikely that the Tories, once in government, will need to go much further than the Treasury is already planning for medium term fiscal consolidation. If they do, it will be a matter of political choice, rather than economic necessity.
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