Wednesday, June 09, 2010

Seriously Though...

Now he tells us:
"There is nothing progressive about a government that consistently spends more than it can raise in taxation and certainly nothing progressive that endows generations to come with the liabilities incurred with respect to the current generation...
I found it very frustrating to sit in meetings with some of my fellow ministers talking about creating jobs in the green economy, creating jobs in biotechnology. The Government can't create jobs. The Government can create the environment which is conducive to the creation of jobs but it cannot create jobs and we mislead ourselves if we believe it can."
That's absolutely brilliant My Lord.

Just a shame you didn't think to mention it before.

Of course, ex-Treasury Labour Goat Myners at least got a peerage for his collaboration with Stalin - all the rest of us got was a serious headache and two decades of penury.

But seriously though, just how are we going to dig ourselves out of Labour's latest horribly deep hole - deeper and more horrible than any previous hole even they've managed to fashion?

Ratings agency Fitch advises us to tighten our belts a few notches:
"The scale of the United Kingdom's fiscal challenge is formidable and warrants a strong medium term consolidation strategy...

"Both the size of the deficit currently projected for 2011 and the failure to reduce the deficit to 3 percent of GDP within five years are striking... A more ambitious deficit-reduction path — with borrowing 1 percent lower than in budget 2010 through the medium term — would result in an earlier peak in the debt/GDP ratio and a clearly declining debt path within the medium-term horizon, helping to go some way to restoring fiscal space, or a cushion against further shocks."
Yes, but what does that actually mean? We've been trying to work it out, and to help us we've taken a quick look at George's latest public spending paper.

Let's start with his summary chart on Labour's management of the public finances - total expenditure vs total tax receipts, both as a percentage of GDP:

As we can see, whereas receipts trundled along fairly steadily at an average 38% of GDP, expenditure was on the increase virtually from the start. We moved into deficit in 2001-02, and remained there ever since - despite the economic boom up to 2007.

So starting from the gap we now have, to cut borrowing from this year's 11% of GDP down to 3% by 2014-15 entails some combination of the following (and do stop me if you've heard all this before):
  1. Spending cuts - other things equal, we'd need to reduce spending by about 17%, or £120bn pa - roughly the entire UK NHS budget, say.
  2. Tax increases - other things equal, we'd need to increase tax revenue by around 22% - hiking the standard rate of income tax from 20p to 50p might do it (at least, according to the HMT tax ready reckoner)
  3. Increase GDP - the magic bullet - it not only increases the denominator in our calculation of borrowing as a percentage of GDP, but more importantly it generates extra tax revenue for a given set of tax rates, and reduces welfare spending as more people move into work.
Have a quick ponder on those alternatives.

Spending cuts are definitely on the agenda, and yesterday George published his framework document explaining the process by which he will attempt to deliver them. Including his hopes to engage the public in thinking the unthinkable.

But engagement or not, just how much cutting will the public tolerate over a single Parliament? And more to the point, just how many by-election defeats will Cam/Clegg tolerate? The TPA/IOD have proposed cuts totalling £50bn pa (see this blog), but even those - many of which have been rejected by Cam/Clegg - fall way short of Fitch's implied £120bn target. However much we might want to see cuts of that magnitude, realistically it just ain't going to happen.

Tax hikes are already coming thick and fast, including the new 50p top rate, higher employees' NICs, and the prospective VAT increase. But a hike delivering £120bn pa isn't on anyone's hitlist.

Besides, the one thing we must all understand by now is that tax hikes would zap any chance of help from our third alternative - the one real hope of escape - GDP growth.

As we've blogged before, the old HM Treasury rule of thumb says that a 1% increase in GDP (relative to trend) cuts the fiscal deficit by around 0.7% of GDP, through its impact on tax receipts and welfare spending.

Which in our current predicament is really rather encouraging. Because it means that we could achieve Fitch's target without spending cuts and without tax increases if we could just somehow grow our GDP by around 11% from current levels.


Surely that can't be too much to ask, can it?

Why, our last Chancellor but one wouldn't have wiped his spotty behind on a mere 11%. Over 5 years that's just 2% pa - a tad below our actual long-term trend growth rate, let alone his own historic achievements.

And that is why George really must do whatever it takes to promote growth. Not the kind of growth that depends on government support and subsidy - the green economy and biotech nonsense Lord Myners is now so irritated about. No, we must have the kind of self-sustaining growth that takes place in the real world of the market economy. And that means cutting business and payroll taxes soonest, and all other growth destroying taxes immediately thereafter.

Of course, a market-based growth strategy is no substitute for spending cuts. They need to happen anyway, and George will need to accept and spell out a decade of severe restraint. Sharing the proceeds is dead for the forseeable future, and instead, public spending growth will be held well below the growth of the economy.

But a strategy based on promoting growth offers us hope. And as we enter our decade of cuts, cuts, cuts, and more cuts, hope is something that will be in pretty short supply.

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