As we all understand by now, public spending will have to be cut drastically after the next election. Brown will leave us with a legacy of debt that we will be paying off for decades, and short of taxing the economy into oblivion, public spending will have to slashed.
But how much? What figure should George be targeting?
This week, ConservativeHome published an interesting - and unnerving - paper by Malcolm Offord. He estimates that by 2020, annual spending might need to be cut by £185bn (in today's money) from what it would be under unchanged policies. That's equivalent to around 30% of today's public spending - an eye-watering cut.
Offord's projections are based on GDP falling by 5% between 2008-09 and 2009-10, flattening out in 2010-11, and then growing again by 2.5% pa thereafter - not unreasonable, and certainly not the Armageddon scenario predicted by some. But what drives his savage spending cuts is the fact that even under his moderate assumptions our debt/GDP ratio soars way above a long-term sustainable level.
In the absence of spending cuts or tax increases, Offord projects our Maastricht debt ratio will rise to a stonking 156% by 2019-20. Not only would that be nearly 3 times the 60% maximum permitted under Maastrict, much more importantly, it would almost certainly trigger the wholesale flight by international investors we've blogged about so often. Which would really put us in the merde.
It's difficult to argue with Offord's logic, but the bad news is that his assumptions may not be pessimistic enough.
In particular, he factors in less than £200bn for the bank bailouts, and with our guaranteed banks now holding combined liabilities of £7 trillion, that may well turn out to be light.
There's also the nasty business of debt interest payments. Offord assumes that the interest rate demanded by investors for buying gilts will not go above 7%. But back in the dark days of 1974 it reached 17%. If we got back to anything like that - which could easily happen in our high inflation future (see this post) - it would mean debt interest payments going up beyond Offord's projection.
This is the debt interest doomsday machine we've blogged about so often (eg see here) - the more you borrow, the more you have to spend on debt interest, the more you have to borrow, the more etc etc etc.
But here's the really shocking part: on Offord's projection, debt interest payments in 2019-20 will be 28% of tax revenue. Which is more than twice what they have ever been in our entire post-WW2 history:
It won't happen.
It won't happen because international creditors will turn off our life-support system long before then. We will be forced to cut public spending.
And the good news - or at least, the somewhat less terminal news - is that the sooner we start cutting, the less we'll have to borrow, the less debt we'll build up, the less we'll have to pay in interest, and the less we'll ultimately have to cut.
So with the right action soon, the target number should never reach £185bn.
But cutswise, George still needs to be thinking BIG.
Like, £50bn pa big.
That would be a public spending cut of about 7%... or getting on for twice what Callaghan achieved under the IMF cosh (see this post).
Gulp, and double gulp.