The battle lines for the next general election are already being drawn. Gordon Brown plans to fight on a platform of protecting public services from savage Tory cuts. We’ve already heard plenty about the policemen and nurses who’ll be fired if the Conservatives win next year, and we’ll hear plenty about the teachers and care-workers who’ll join them in the next ten months.
You might think a government presiding over a budget deficit now expected to hit a huge 12% of GDP – the highest in the developed world, and the biggest the UK has run since it was engaged in the small matter of fighting World War II – would at least be willing to concede that spending had to be tightened up a bit.
Not at all. The government insists that spending will keep rising. In the House of Commons, Brown argued that capital spending would rise up to and including the 2012 Olympics. Ed Balls, the schools secretary, has insisted that education spending can keep rising in real terms. There has so far not been a single admission by a senior government figure that spending will have to be cut in real terms and, in many cases, savagely.
That is nonsense. Real Madrid might be able to carry on spending money as if the credit crunch had never happened. The British government won’t be able to. And Brown’s rhetoric is dishonest, as plenty of independent experts have already pointed out. The last budget pencilled in cuts of 7% in real terms to public spending for the years after 2011.
The truth is, as anyone who looks at the figures can quickly work out, that whoever forms the next government will have to push through painful cuts.
“We must live within our means”, said Chancellor Alistair Darling in his speech to the Mansion House. “There are tough choices ahead.” In reality, the only decision facing any British government is whether it wants to get serious about the black hole in its finances now or after the election. Deficit spending on the current scale – one in every four pounds the government spends this year will be borrowed money, and it will be taking on extra debts of £14,000 for every family in Britain – simply isn’t possible.
But right now, the yah-boo rhetoric is crowding out any kind of serious debate about how that deficit can be bought under control. Countries can significantly cut state spending without slashing services or tearing up welfare programmes. In Canada, for example, government spending as a percentage of GDP peaked at 53% in 1992, which is roughly where Britain will get to next year. It has now fallen to 38% of GDP. Outstanding debt was cut to 32% of GDP in 2008 from 71% in 1995. At the same time, corporate taxes were cut all the way to 15%, and little damage was done to the country’s traditional welfare and healthcare systems.
Most of this was achieved by cutting state payrolls while cutting business taxes, so that people laid off in the public sector could move into jobs created in the private sector. There is no great miracle about it. But so far the UK is resisting learning any lessons about how other countries have curbed their deficits.
Worse, the currency markets are going to take fright. Ignore the recent rise in sterling. That will be reversed soon, probably sharply. Standard & Poor’s has already cut its rating on the UK, putting it on ‘negative’ outlook. That’s just the start. The ratings agencies have cut Japanese and Irish debt, countries which are in no worse fiscal shape than Britain. So far currency markets have remained fairly sanguine about the collapse of UK government finances, largely because they assume a change of government is imminent. The Tories will restore discipline even if Gordon Brown won’t.
Yet as the debate becomes ever more divorced from reality, that is unlikely to last. At some point, confidence will crack, and sterling will face a collapse that will make funding the deficit far harder. In a world where most governments are borrowing on an unprecedented scale, there is not much incentive for investors to hand their money to a government that shows no inclination even to admit spending has to be reined back.
Most seriously, if politicians won’t get a grip on spending, the Bank of England might have to do it for them. “If, as seems likely, the necessary fiscal surgery is delayed, then the Monetary Policy Committee is likely to judge that the responsibility for maintaining economic and market stability falls to them and cannot be ducked,” argues Citigroup economist Michael Saunders. He forecasts as many as three half-point hikes in interest rates in 2010 as the inflationary consequences of huge deficit spending become clear. Couple that with the tax rises needed to cope with the deficit, and the inevitable slow down in public spending, and it’s clear we face a squeeze on spending. Forget a rapid return to growth. Britain will be lucky if it avoids another recession in 2010 and 2011.
We need to start a serious debate about how to bring public spending under control right now. The longer this is postponed, the worse the pain will be when we do finally address the issue.