Thursday, April 22, 2010

Coalition Cuts

Helmut delivered coalition cuts... but we haven't got Helmut... or Germany's other politicos

As we hurtle towards our Jedward style election, the prospect of a hung parliament and some kind of coalition government looms ever larger. And the key question is whether such a government could possibly deliver the cuts we must have?

Because what we all need to remember is that these cuts are unavoidable. Depending on whose figures you believe, HMG is living £70-140bn pa beyond its means. And the only real question is whether we make the cuts in a considered way - attempting to safeguard the more valuable bits of public spending - or whether we make them over a single weekend of panic with an IMF gun pointed at our head.

We think a hung parliament will make the latter much more likely. As Ken said yesterday:

“The bond markets won’t wait for all the discussions and horse trading. Sterling will wobble. If Britain doesn’t deliver a Government a working majority, markets don’t think that we can tackle the problem, then the IMF will have to do it for us.”
Which sounds spot on to us. We'd be straight into a re-run of 1974-76, when a wobbly Labour government failed to grip a huge fiscal deficit, until forced to do so by a melt-down financial crisis and an IMF visit. And in that case, the government had actually started out with a majority - albeit wafer-thin (3 seats).

But despite that grim experience, there are those who reckon a coalition would actually be better at making the cuts, because it would have broader legitimacy. After all, our strained first-past-the-post electoral system means that no modern government ever has majority support (the current one only got 35% of the votes). So wouldn't it be better to combine the support for two parties?

Frankly, nobody has any idea. While it is true that coalition governments overseas have from time-to-time managed to implement substantial cuts programmes (eg Germany in the 1990s), we have no modern experience of such governments. A coalition would be trying to invent the rules at the same time as tackling the biggest peacetime fiscal deficit ever. Which doesn't sound at all reassuring.

And there's another key point. Minority and coalition governments only ever seem to have been able to succeed after a prolonged period of failure and crisis. For example, a minority government in Ireland managed a successful consolidation in the late 80s, but only after nearly a decade of failure during which government debt interest payments soared to 30% of revenues (eg see here, and see here for excellent Policy Exchange overview of selected fiscal consolidations in the UK and around the world).

Of course, as we've blogged before, there is absolutely no guarantee that even a majority Tory government would actually make the cuts required. And it may be that nobody will do all that's required until we as a nation have suffered our Dunkirk moment.

But a coalition government - probably with the increasingly unconvincing St Vince as Chancellor - would be the least likely to grip anything. Sooner or later we'd face that IMF gun, and a slash and burn emergency package that would make no discrimination between what we do and do not need.

PS If you missed yesterday's Chancellor's debate, you should definitely catch up on the demolition of St Vincent da Flipflop. Guido has the key clip here.

PPS On those German cuts, they were necessitated by the bill for German reunification. Kohl had initially promised reunification could be achieved without the need for tax increases. When that turned out to be nonsense, he was forced to introduce a string of increases in social contributions (aka hidden taxes - cf NICs), sell off government assets, and even fudge the budget numbers (thank God that could never happen here). Only after taxpayers started getting seriously pissed was he forced into serious action on spending. And he was further pressed by the need to meet the strict fiscal criteria for joining the impending Euro - a kind of external IMF-style cosh (only later did it emerge that half the other joiners, like Greece, cheated their way in).

1 comment:

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