Tuesday, September 15, 2009

Mouth Foaming News

St Vince hasn't yet tried it

Last April Reform called for cuts of £30bn pa (see here).

Then last week, the TaxPayers' Alliance and the Institute of Directors called for cuts of £50bn pa (see here).

Now, no less a figure than St Vincent da Cable is calling for cuts of £80bn pa.

£80 bn.

Yea, verily, I say unto you, who can now doubt the absolute necessity for drastic action? St Vince is known to all as the solemn yet humane voice of financial righteousness. He neither foams at mouth, nor froths, nor yet breathes heavy panting for spending cuts. True, the godless clueless left have taken to denying him, but we must expect that. We know him still.

St Vince has worked with the very excellent Reform to produce his paper. It's a splendid read, and as he emphasised when presenting it, it focuses on cutting spending rather than increasing tax. As far as he's concerned, it's spending that has to bear the brunt of the tough decisions, not tax.

He proposes the following headline spending cuts:
  • Zero growth overall for public sector pay (save £2.4 billion a year) - 25% reduction in the total pay bill of staff earning over £100,000 - salary freeze and end of bonuses for the civil service (save £200 million a year)
  • Taper family tax credit – save £1.35 billion
  • Radical review of public sector pensions - higher employee contributions and later retirement ages
  • Scrap major IT systems - ID cards, NPfIT, Contactpoint, and proposed “super database”
  • Curb “industrial policy” - scrap Regional Development Agencies (£2.3bn pa) and EGCD subsidies (£100m pa) and reducing (by at least half) the Train to Gain and Skills Councils budgets (£990m pa)
  • NHS - scrap Strategic Health Authorities (£200m pa) – save £2bn through tariff reform
  • Education - scrap quangos and cut national strategies and scrapping quangos - saves £0.6bn pa.
  • Defence prucurement- scrap Eurofighter upgrade and Tranche 3 (£5bn over 6 years), A400M (£22 billion), Nimrod MRA4, Defence Training Review contract (£13bn), and the Trident submarine successor (£70 billion over 25 years).

He also wants more asset sales.

It all looks entirely sensible, and while many of the measures have been proposed before, they must gain authority coming from a non-frothing, non-foaming, non-heavy breathing voice of reason like Vincent.

There is just one small fly in the jolly old ointment. In terms of annual savings in the near-term, the specific measures he proposes don't deliver savings of anything like the £80bn pa promised. In fact, according to the Grun they only add up to £14bn pa, less than one-fifth of the suggested total.

Moreover, when you read the paper, there's no actual mention of £80bn at all. So where did Tyler get that figure from?

Well, actually, from the man himself. Tyler asked him outright at this morning's sermon presentation how much we needed to cut. And Vince said while he didn't have his calculator with him, it was about £80bn.

In reaching that number, he starts from the estimates of our so-called "structural deficit" . As the paper explains:

"From a policy point of view, we need to know how much of the borrowing and deficit is “structural”; that is, will not correct itself with economic recovery... It is now clear (or clearer) that spending plans and revenue assumptions made several years ago were based on an optimistic view of the sustainability of the boom in both financial services and in the housing market. That is why government and independent forecasters now assess the “structural” deficit, retrospectively, as being much bigger than when they assessed the numbers before the recent crisis."

It is this structural deficit we really have to worry about because as Vince says, that's the element of the government's borrowing that will not correct itself*. However, since we can't actually see it, the structural deficit has to be estimated, and the estimates vary from around 6% of GDP (HMG's figure), to around 10% (the OECD's figure -see this blog).

This morning, Vince told us he reckoned 8% was about the right number. But even taking the government's lower 6% figure it would mean cuts of around £80bn - "the sort of figure we need to be thinking about".

In which case, Vince does need to get his thinking cap back on. £16bn is a good start, but he needs a further £64bn from somewhere.

And unless he wishes to join us sinners in the outer darkness, he needs to find it without too much foaming or frothing or heavy breathing. (We'll ignore the Major's extraordinarily twisted view that St Vince is trying to have it both ways - grandstanding with the fiscal angels out here in the cold, while still carousing with the Big Government spendaholics back in the snug).

*Footnote. When we say the structural deficit will not correct itself, and will require spending cuts or tax increases, we should add that's not quite the whole story. Because if you believe our economy will eventually return to some longterm "trend"growth (as we do), it will over time deliver higher tax revenues on unchanged tax rates. So in theory, the government could simply freeze, rather than cut, departmental spending budgets and wait for revenues to "catch up". However, while that might sound the easier course, in practice, it's not so easy. For one thing, with a future trend growth rate of say 2% pa (and some think it will be lower), it would still take a decade or more to close our structural deficit. During that period, government borrowing would have to make up the difference, driving up debt servicing costs, which in turn would drive up the structural deficit itself. Moreover, freezing public spending for a decade is itself a very difficult task - as the 70s and 80s showed only too clearly. And all the while, the financial markets would remain extremely nervous, rushing for the exit at any sign that the government was about to renege on its commitments (eg default via inflation). Interest rates on government debt would undoubtedly rack up, exacerbating the structural deficit problem. So at the end of the day, there is no alternative - we must have a credible plan for eliminating the deficit in no more than the course of a single Parliament.

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