Friday, October 9, 2009

Spending Cuts

Two years ago, the UK could boast one of the lowest public sector debt to GDP ratios in the OECD. Yet, within a short space of time, the UK has emerged with one of the highest annual budget deficits in the world. The budget deficit is forecast to be a huge £175bn touching 12-13% of GDP next year. This is much higher than the budget deficit of the 1970s, when the UK required a bailout from the IMF.

A significant part of the deficit is due to the recession and attempts to stimulate spending. In particular tax receipts, reliant on a booming property and stock market have collapsed, e.g stamp duty and income tax.

However, in addition to the cyclical factors, the low deficits of 2006, masked an underlying structural deficit which is predicted to worsen as demographic factors increase future pressures on government spending.

Although, fears of government borrowing in a recession are often misplaced, the undeniable fact is that sooner or later, the UK, will need to tackle this worryingly large underlying structural deficit.

Timing will be a fine balancing act. Cut the deficit too soon and too sharply, and we risk plunging the economy back into recession. Cut it too late and we risk unnerving the bond markets with an ever rising need for selling government bonds. It may be that we need to cut the deficit and, at the same time, hope monetary policy can maintain the fragile recovery.

But, with public sector spending reaching nearly 48% of GDP, there is a need to restrain it.

Choosing which sectors to cut will be no easy political matters. It is easy for politicians to say they will cut the unnecessary red tape / bureaucracy costs and leave underlying services. But, has there ever been a time when politicians have not said they will cut bureaucracy costs? Also it is the kind of deficit where trimming the edges and axing a few quangos will do little to make more than a dint on the underlying problem.

Labour say the NHS is a sacred cow and this will not be touched. But, it was health care which was the biggest beneficiary of the now seemingly extravagant spending rises in the boom years. (see: health care spending) 2/5 of this extra spending went to higher pay for doctor and nurses. Anyone fancy imposing a pay freeze on our dedicated nurses and doctors? (and I hope my sister isn't reading) Or does anyone fancy raising the retirement age to 75?

The problem is the deficit will need radical (i.e. politically unpopular choices), and some pressure groups are going to be more than a little upset.

The post on welfare benefits was not very detailed, but, it does touch on the huge figures of over £200bn we will be spending on social security every year. The press love to highlight cases of the government spending tens of thousands of pounds to house a family of 7 asylum seekers e.t.c. But, although it is populist politics, it is still true that we do spend enormous sums on welfare support. It is in areas like Social Security where we may have to find significant cuts. But, again it is a fine line between cutting out the benefit cheats and creating a more unequal society with more living in poverty.

As I've said before, it's not the best time to be the Chancellor of the Exchequer.

1 comment:

Anonymous said...

What spending cuts? The UK government will continue to spend MORE than it takes in: