Now we know the grim truth about cuts
EVEN if you already suspected that Gordon Brown’s post-1997 public spending spree had been an unaffordable disaster, yesterday’s leaked Treasury forecasts made depressing reading. Everybody knows that there will have to be major spending cuts and that the current tax base cannot finance our bloated government; the Institute for Fiscal Studies had long since worked out that this was actually the 2009 Budget’s implicit message, even though this was at first vehemently denied by Brown.
All the juicy details were carefully omitted from the Budget; it was as if, like MPs’ expenses documents, they had been “redacted” to prevent the public from finding out just how severe the cuts would be. Yesterday’s revelations fill in all the gaps.
This being a pre-election year, departmental spending will surge by an astonishing, vote-buying 6.4 per cent in real terms. But no sooner is the voting out of the way that budgets will be hacked back for at least four years in a row. By 2013-14, it will have fallen by over 9 per cent in real terms.
In the private sector, efficiency savings of that nature could be achieved without impacting on the service provided to the consumer, especially given the huge increases in budgets of previous years. But the internal dynamics of government-financed institutions are very different. Let us hope management in the state sector can be incentivised to manage these cutbacks, or that outside consultants and special advisers can be brought in to radically reform structures.
The real shocker is the extent to which spending on the likes of schools and hospitals will have to be pared back to make way for a massive increase in social security spending and debt interest repayments. Brown used to describe those two spending components as the bill for social failure and would endlessly boast about how he would drastically reduce their share of GDP. It has turned out to be as ridiculous a claim as his longstanding assertion to have “abolished boom and bust”.
Departmental spending will have risen by 5.9 per cent of national income between 1998-99 and 2009-10, the Institute for Fiscal Studies calculates. Yesterday’s leaked projections imply that almost three-quarters of this increase will have to be reversed by the end of the next Spending Review in 2013-14. If spending cuts are used to achieve the entire remaining fiscal tightening that the Treasury thinks necessary, departments’ spending would be 1.4 per cent of GDP lower in 2017-18 than in 1998-99. There will also have to be severe reductions in capital spending.
If anything, however, even those forecasts are too optimistic. Debt interest is projected to jump from £27.2bn this year to £63.7bn by 2013-14, wasting 3.5 per cent of GDP (up from two per cent now). The reality is likely to be even worse: the national debt will probably turn out to be much larger than the Treasury expects, and there is no way the average interest rate charged on that debt will decline. The Treasury sees a fall from five per cent to 4.6; this is completely unrealistic.
Hundreds of thousands of public sector workers will lose their jobs over the next few years. There will be endless rounds of cutbacks. This is not a prospect anybody should relish. But economic reality means the government needs to be shrunk drastically. There is no alternative.