The central message of yesterday’s PBR was that we need to put the national finances in order, but not quite yet – in fact not for quite a long time. That does not mean there will not be severe cuts in public spending – there will be. It’s just that they will be severe rather than apocalyptic. With health, education and policing protected other areas will be hit all the harder. Local government especially will probably face between 15-20% cumulative cuts over the next four years.
Before the current crisis public spending was hovering around 42-43% of GDP, but within that a lot more went to public services because debt-servicing and transfer payments for benefits and pensions were fairly low.
We also had a small structural deficit – that is for some years government was taking in less than it was spending, and national debt was creeping to 40% of GDP – the ceiling proclaimed by Gordon Brown back in 1997. Now spending is due to rise to 48% of GDP and the cumulative deficit to a staggering £1.5 trillion by 2014-15. Even after the annual deficit is cut in half, at the top of the next economic cycle, it will still mean the government is spending about £60bn a year more than it gets in from taxes. The Tories of course want to do more, and more quickly, to reduce the deficit but it’s hard to see how much further they could push without causing both economic and political mayhem.
All the sound and fury, however, about how much, and how fast, to cut is focuses entirely around the issue of the annual deficit and the cumulative public debt. This obscures the fundamental question about how big, in the future, do we as a country want our public domain to be as a proportion of national wealth?
For the past four-five decades public spending and a proportion of GDP has hovered around 43% – it has sometimes risen to around 50% (under both Labour and Tories) and shrunk as low as 36% (under New Labour). But for the past few years there has been a political consensus that it should be about 42-43% of GDP – what we don’t yet know is where either main party think it ought to be in the future.
What to do about deficit and debt depends to a large extent on where you want to end up. New Labour are saying they think they can protect most of the major gains in public service provision made over the past decade, and in the long-term we can stay more or less where we are. The Tories are saying they would become chaste right now – cutting spending faster but also further and permanently shift the boundaries between the state and the markets.
Alasdair Darling’s political balancing act today was to say he’d cut in global terms to satisfy the money markets, but not spelling out the detail to avoid scaring the public too much. His solution is based on a huge gamble that the economy revives in 2011 and resumes its trend growth rate.