Wednesday, September 02, 2009
Who's Got The Secret File?
Tyler spent this lunchtime chewing the fat with a couple of eminent think-tankers. Well, actually it was a chicken sandwich, but the main item on the menu was a burning question - do Dave and George actually have that secret file containing detailed and workable plans for cutting public expenditure?
Let's remind ourselves of the story so far.
We are in the biggest fiscal hole ever seen in peacetime. The government is borrowing at an entirely unsustainable rate. Spending needs to be cut by around £50bn pa - a colossal 7-8% of the total. The only reason the financial markets have not yet thrown a wobbly is that they are giving Dave and George the benefit of the doubt (the current incumbents being universally viewed as a total irrelevance).
What the markets are looking for is decisive action on public spending within a few weeks - not months - of the election. And if they don't get it, they will withdraw their love. Which will be painful.
It means they will demand a much higher interest rate for lending to the government - and the rest of us. And it means they will head for the exit in terms of our currency, especially since one-third of UK government bonds are now held by overseas investors with little natural reason to hold them.
And none of this will happen in a gentle controlled manner. It will happen via a bowel loosening series of crises. Sterling will collapse, ramping up inflation. Mortgage rates will soar. Government credibility will be blown. Emergency budgets will raise taxes and slash spending. Public sector unions will strike. Schools and hospitals will close. Jobs will incinerate.
It will be the 70s on vodka Red Bull, and trust me, we really don't want to go there.
So you really hope Dave and George have worked out their plan and written it down in the secret file. On Day One they walk in, hand the file to the Treasury mandarins, and tell them to draw up the budget soonest - no ifs, no buts. D&G hit the ground running, and after the hand-to-mouth shambles of Labour, everyone breathes a huge sigh of relief.
Sure, we understand why D&G won't share this file with us ahead of the election. If they did, Labour and the BBC would accuse them of plotting to destroy our public services, with babies and old people left to die in the gutter etc etc. We understand that. But the file must exist, right? Because otherwise they won't have a prayer of getting on the front foot.
Unfortunately, Tyler has yet to find anyone who believes there is a file. Instead, he keeps hearing stories of Tory Party researchers banned from working up plans for spending cuts in case they leak out.
What we do know is that Dave has ringfenced the NHS and overseas aid, which immediately means c20% of public spending is exempt from cuts. We also know that brand decontaminating Cam will find it very difficult to make serious cuts in welfare entitlements, which could take out another c30%. Then there's debt interest which can't be cut, and takes out another 5-10%.
On that basis, the required £50bn pa cut will fall on a base spending total of around £300bn. Which implies a spending cut in education, defence, and the police of an eye-watering 17%.
That is more than enough to explain why the file has not been seen by anyone: Dave does not even want to contemplate what a 17% cut might mean for class sizes etc.
But if there is no file, what's the alternative exactly?
Tyler has a horrible feeling there isn't an alternative.
Or rather, the alternative is muddling through and hoping for the best. Hoping that economic growth will miraculously restart and bail us all out. Which is pretty well what the current lot are hoping. And Wislon, and Callaghan before them.
The problem is that, despite all the wishful talk of green shoots, the sort of sustained growth we need simply won't be there. The only reason the economy is stabilising right now is because of the massive monetary and fiscal stimulus currently being applied. But that is unsustainable. The financial markets know it, and unless they see a convincing programme of retrenchment rolled out post-election, they will take matters into their own hands.
As we've blogged many times, we have had a decade of public spending beyond our means, and a period of pain is now unavoidable. Far better to take it on the chin through a controlled programme of planned cuts, rather than be forced into a disorderly and bloody retreat under heavy fire from the markets.