We won’t be able to say we weren’t warned. This week the Prime Minister laid down in very stark terms how severe the effects of the impending cuts in public spending are likely to be. And his chancellor has invited us to make our own suggestions about what government should and should not go on spending our money on. How deep do the cuts need to be? What needs to face the chop? And what should be spared?
David Cameron was blunt about tackling the deficit. He said: “How we deal with these things will affect our economy, our society – indeed our whole way of life. The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades to come.”
The extent of the problem
The Prime Minister claimed, in a speech on Monday to the Open University in Milton Keynes, that the situation was worse than the Government realised when it came into office last month. The previous Labour government, he suggested, had concealed the real extent of the problem.
In particular, he argued that it had failed to reveal that the cost of making interest payments on government debt was due to rise from £41.6bn this year to around £70bn in 2014-15. “That is a simply staggering amount,” he said. “Today we spend more on debt interest than we do on running schools in England. But £70bn means spending more on debt interest than we currently do on running schools in England, plus climate change plus transport.” He said it was “a terrible, terrible waste of money”.
He argued that the Labour government had presided over ‘two economies’ with public spending booming by 15% since 2007 while private sector employment had fallen by 3.7%: “a public sector boom and a private sector bust”.
However he was accused of talking 'nonsense' by the former Labour chancellor, Alistair Darling, who claimed that in his last budget he had been perfectly clear about the rise in debt interest payments. Furthermore, Labour argues, it was only because the public sector grew during the last three years that the economy was saved from an even deeper recession. As a result, the deficit this year turned out to be nearly £20bn less than was forecast a year ago. Blaming an outgoing government for leaving things worse than anyone expected was the oldest trick in the book, Mr Darling said. But in this case it wasn’t true.
Nonetheless, all parties agreed during the election campaign that the deficit would have to be tackled sooner or later. The Conservatives argued that cuts needed to be made this year with Labour and the Liberal Democrats saying we needed to wait till next. The Lib Dems changed their mind when they struck the deal with the Tories to form a coalition and a package of £6.2bn cuts for this year has already been announced. The coalition takes comfort from the fact that its approach was endorsed last weekend by the international Organisation for Economic Cooperation and Development, which changed its view to say that cuts in Government deficits did need to begin straightaway.
But £6.2bn is small beer compared with what the government thinks needs cutting over the next few years. The deficit this year amounts to around 13% of national income. The overall volume of government debt, at £952bn, or 63.6% of national income, is set to rise to £1.4tn (74.9%) by 2014/15. How can these figures be reduced?
The Government is looking to Canada for inspiration. Back in 1992 Canada’s government debt was around 70% of national income, with the annual deficit running at 9%. Within three years the deficit had been reduced to 5.5% and the government was running a surplus by 1997. The coalition Government here hopes to emulate the Canadian success.
There were two elements to that success. In the first place, every government department was required to justify all aspects of spending and what was not deemed necessary was cut. George Osborne, the Chancellor, intends to imitate this exercise. A new ‘star chamber’ of senior ministers and the brightest civil servants will require spending ministers to argue not only for every penny they receive but also whether or not they need to go on carrying out every function in their department. Anything deemed inessential is likely to be cut.
The other element was to involve the public in the decision-making as much as possible. Paul Martin, the Canadian finance minister who oversaw the cuts, says of such exercises in cutting spending: “The markets are not being cut, it’s the people who are being cut. If you prepare them well, people will understand. They will not stay with you unless they feel that the sacrifice you’re asking of them is going to succeed.”
It’s this which seems to lie behind the Government’s invitation to the public to make their own suggestions about which functions they think the Government should go on providing and which can be done by others.
Sceptics argue, however, that it will be very difficult for the Government to repeat the Canadian success. They point out that Canada was able to eliminate its deficit not only because it took the axe to public spending but, even more, because the economy was able to grow at an annual rate of around 3% between 1992 and 1997. The reason for that was that the United States, Canada’s main export market, was booming at the time.
Here things are very different. Britain’s main export market, the European Union, is not only barely growing but is facing a major crisis with the euro which could well lead to a second recession. The knock-on effect would be to damage Britain’s own growth prospects. Indeed such sceptics argue that the charge against the Labour government is not that it concealed the growth in debt interest over the next few years but that it was far too optimistic about future rates of growth.
The danger for the new Government, they argue, is that with consumers still paying off their debts, with export markets at best sluggish, and with businesses reluctant to invest, cuts in Government spending will remove the only remaining stimulus to growth. The result could be a second recession with the Government’s finances actually getting worse despite the spending cuts.
The Government, however, sees the coming review of public spending as more than just a cuts exercise. It has been described by a Treasury official as a “fundamental re-evaluation of the role of government” and a “once-in-a-generation opportunity to transform the way government works”. Perhaps that is what the Prime Minister is really flagging up when he tells us that our whole way of life may be about to change.