Saturday, January 30, 2010

Cuts: 57 Varieties

Let's not go there

This  morning on BBC R4 Today, Evan Davis asked Darling why he won't tell us what he's going to cut. In the light of the ongoing Greek lesson, surely that would be the best way to retain market confidence?

Darling repeated his recent claim that he's already told us: £57bn of cuts already announced. Sounds pretty impressive, and Davis failed to challenge him.

But as we blogged here, that £57bn relates to annual savings that will not appear until four years from now. What's more, they remain largely unspecified: all we know from the Pre-Budget Report is that they comprise roughly one-third specified tax rises - including the new tax on jobs - roughly one-third unspecified capital investment cuts, and roughly one-third unspecified current spending cuts.

In other words, Darling's cuts could be virtually any of 57 different varieties. Schools, hospitals, roads, teachers, nurses, old people, babies - you name it, any or all could be facing the axe. He has not squared up to the tough decisions, which are all about what specifically are you going to cut?

Yet the Tories have still done little better. True, they have specified a handful of items for cutting, but all together they only add up to £7bn pa savings - not nearly enough.

Still, at least the Tories sound like they understand the problem. Yesterday at the annual Swiss Egofest, Cam gave another speech emphasising the risks to confidence and interest rates if we don't do the necessary. He pointed out that the advocates of early cuts are fast becoming the mainstream:
"World-leading economists. The Governor of the Bank of England. The OECD. The Conservative Party. All of us are agreed on the importance of being clear about the risk the deficit poses and of the importance of making an early start.
This emerging consensus isn't built on conjecture - it's based on experience. Historically, fiscal consolidation - particularly when markets are losing confidence - leads to higher, not lower economic growth.
Just look at what happened in the 1990s in Canada, in New Zealand and in Sweden. Each had huge deficit troubles, each dealt with them decisively - and each grew faster as a result. Sweden turned a 10 per cent deficit into a surplus in just five years, staving off a fiscal crisis and helping to deliver years of strong economic growth."
All of which sounds spot on: serious and early cuts in order that we can rebuild confidence and return the economy to sustainable long-term growth.

Except that he subsequently spoiled it by wandering off-piste:
"...early action doesn't have to be particularly extensive, it just has to be early, and it has got to be action.'
Yet another of those 57 varieties - early cuts but not extensive cuts.

Let's just remind ourselves of the essential facts here.

HMG is currently borrowing 13% of GDP every year, which is way beyond what is sustainable over more than a year or two. Why? First, because the markets won't go on lending at anything like the same rate of interest. And second, because we can't afford to go on borrowing on this scale - even at current interest rates, £200bn+ pa of gross gilt issuance means an addition to annual debt interest costs of getting on for £10bn pa - cumulative.

So we need action that is both early and extensive.

And as Cam says, the evidence from other countries (and indeed our own experience in the early 80s) is that spending cuts to tackle fiscal deficits are the precursor to faster GDP growth, not the gateway to depression.

It's all about confidence - the confidence of investors in the future, and the confidence of governments to make tough choices among the 57 varieties. And then to stick to them.

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