Sunday, July 05, 2009

Doomsday Dossier Nightmare Scenario

There are nightmare scenarios, and then there are Nightmare Scenarios

According to the Sunday Times:

"Secret “doomsday” plans for 20% cuts in public spending are being prepared by senior civil servants, who fear politicians are failing to confront the scale of the budget black hole.

Whitehall mandarins have begun creating detailed dossiers containing reductions in expenditure that are far deeper than the more modest savings being proposed by Labour and Conservative politicians.

Senior civil servants have let it be known that they are sceptical about the claims made by both main parties on public spending. Mandarins, fearing a prolonged recession and a collapse in tax revenue, have begun planning for more severe cuts of up to 20%.

The dossiers will be handed to cabinet ministers the day after the next general election, whichever party wins."

Of course, the civil service always prepares secret plans for an incoming administration - Tyler himself was involved in just such an exercise at HMT ahead of the 1979 election. But usually the plans are based on each party's own announced policies and manifesto commitments.

In this case, the mandarins are having to work blind: Labour politicos ludicrously deny there's a need for any cuts, and the Tory leadership is still not facing up to anything like the full scale of the crisis (even the 10% cuts figure poor old Lansley blurted out is based on the official budget projections, which are far too optimistic - see previous blogs).

But 20% - that is a serious SERIOUS cut.

In cash terms, a 20% cut in 2010-11 would be £140bn, or around 10% of GDP. And even if it was phased in over say two or three years, it would still end up taking 10% out of our already weakened GDP.

And understand this - a 10% GDP whack is a huge amount. It's twice what we've lost so far in this slump.

Those green shoots that many commentators are currently bigging up would be exposed as the mirage they undoubtedly are. In reality, the only reason the economy is apparently levelling out now is that the government sector is taking the strain, both in terms of direct support and a much lower tax take. The mandarins know it is wholly unsustainable, and with 20% spending cuts, it goes into reverse quicker than a Gordo U-turn.

Ah, you say, that 20% figure will just be the mandarins' Worst Case Scenario. It will probably never happen.


The OECD reckons we'll be borrowing 14% of GDP next year, a banana republic style figure unprecedented in our peacetime history. International investors will demand it's addressed, and with tax revenues already out for the count, massive spending cuts are the only option available. And given the extent of that government borrowing (aka living beyond its means), a 20% cut is precisely the kind of magnitude required.

But there's worse.

As we all know by now, some elements of public spending cannot be cut.

Debt interest is one, and that is growing rapidly. Payments under PFI contracts is another.

Welfare payments - including unemployment benefits - could be cut, and almost certainly will be. But it will be very painful, and politicos will not relish being branded as Thatcherite grinders of poor faces.

Which means that the really savage cuts will be concentrated on our public services - the £400bn pa which comprises Departmental Expenditure Limits (DEL).

So let me see... a targeted £140bn cut from a spending base of £400bn... ahh... that's... er... well, bugger me! That's not a 20% cut... it's a 35% cut!

No wonder the mandarins are trying to bounce Darling into a public sector wage freeze (although possibly not for their good selves).

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