Sunday, September 20, 2009

Cosmetic Surgery Won't Cut It

It's gonna take more than a shot of Botox

We're all cutters now.

Even Mr Balls has flipped a back somersault since his appearance in that unconvincing parallel universe play back in June. Back then, he told us: "I think with tough choices we can see real rises in the schools budget in future years". But three months is an eternity in Balls years, and now he says he'll axe 5% off the schools budget.

Apparently he's suddenly discovered he can run our state schools just as well with 3,000 fewer heads and senior teachers. He says:

"You might have a head teacher and a team of deputy heads working across the different schools."

Simple. Being an acknowledged expert on school organisation, Balls knows far better than the heads themselves how to run schools cost effectively. If he thinks our headteachers can each run a group of schools, he must be right. Why, he'll even solve the problem of not enough state school heads to go round on account of nobody wanting to take this particular job from hell (see many previous posts eg here).

But however crazy Balls's frontline cuts proposal is, at least it's a real £2bn cut. Which is more than can be said for some of the government's other cuts ideas now being spun into the media.

Take the imminent scrapping of ID cards. Many of us have long argued for it, so it's welcome. But sadly, it won't save that much dosh, because the planned biometric ID cards are a joint project with the new biometric passports, and (apparently) we have to go on with them. In the TPA/IOD cuts paper we estimated the saving at £55m in 2010-11.

But the relatively modest size of the saving has certainly not stopped the government briefing the cut widely to the press. “It may just be a gesture but it’s exactly the sort of gesture we need,” was how one "senior figure" put it.

Except of course, it was precisely such gesture politics that landed us with so much useless public expenditure in the first place. And cosmetic surgery designed to avoid facing the real issues is exactly the sort of gesture we don't need.

And what about those £20bn NHS cuts the government got McKinsey to work up (see this blog)? Although Health Secretary Burnham told us they are "savings", his spokesperson immediately issued this clarification:

"The £15-20 billion is not being cut from the NHS, it will be taken away from areas where it is not needed and reallocated into areas where it will be most effective."

ie the "saving" is purely cosmetic, and will not reduce overall spending one jot.

Frankly, there isn't a cat's chance these bankrupt derelict buffoons will come up with any real cuts between now and their imminent annihilation. And frankly, nobody - including the financial markets - ever expected them to. So that's fine.

Much more important is that Cam and George come up with the real deal. We simply can't afford cosmetics from them.

And just to ram home the magnitude of their task, here are a couple of charts from the latest very useful IFS paper.

The first shows what happens to government debt as a percentage of GDP over the next three decades without any fiscal tightening.

As we can see, debt goes above 100% well within the next decade, and reaches arround 170% of GDP by the end of the period.

The second chart shows public sector debt interest, again, as a percentage of GDP. It shows the interest burden beginning to spike up alarmingly as soon as next year:

Scary enough.

But the IFS numbers are very much a best case. They are based on HM Treasury's own projections, and in particular, on HMT's belief that our "structural deficit" (ie the deficit that will not disappear automatically as the recession ends) is "only" some 6% of GDP.

If instead, the OECD's estimate of c 10% is right (see this blog), our debt grows very much more rapidly than in the IFS's chart. Indeed, on the OECD's figures, we reckon it shoots above 100% of GDP within the next 2 years.

And if that happens, another critical HMT assumption will almost certainly fall. There is no way the interest rate on government debt will remain at or around current levels, because the markets will take fright. And as we've blogged many times, that would mean a big hike in the cost of borrowing, and a big hike in debt interest costs.

We simply cannot afford to settle for cosmetic surgery.

However painful, Cam has to get a grip on the real problem - the flab within.

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