It seems to be obvious to everyone except the Prime Minister that spending has to be reined in. It could even win votes
This may sound harsh, but it seems the only reasonable explanation of the Prime Minister’s pretence that he will expand public spending throughout the next Parliament, in spite of the mathematical certainty that he or his successor will, in fact, cut spending drastically in 2011 and beyond.
This certainty follows, first, from the laws of mathematics and compound interest. As explained by the Bank of England and every independent economic organisation, a public deficit that settles at 6 or 7 per cent of gross domestic product, even after the recession is over — which is what the Treasury’s present tax and spending plans imply — would mean an infinite accumulation of government debt. Since this cannot happen, government debts will have to be stabilised and this will require some combination of tax increases and public spending cuts, equivalent to a minimum of around 6 per cent of GDP, or £70 billion.
If mathematics were all the next government had to contend with, this money could be raised through extra taxes. But the laws of electoral politics show that no government will impose tax increases of anything like that size. To see why, consider the package proposed to achieve such an increase by John Kay, one of Britain’s leading tax economists and founder of the Institute for Fiscal Studies: a four-point increase in the standard rate of income tax + a three-point increase in VAT to 20 per cent + a freeze on all personal allowances and thresholds + above-inflation rises in petrol, alcohol and cigarette duties. Any government proposing even half these draconian tax measures would be unlikely to keep its majority.
We have to conclude that most of the fiscal retrenchment in the next Parliament will happen through cutbacks in spending. How to distribute these cutbacks should be the main subject for debate between now and the general election. This is now understood by most politicians: not only Tories but also, to their credit, the Liberal Democrats and many independent voices in the Labour Party.
While the Tories focus on cuts in public sector manpower, Blairites call for social security reform, the Liberals want decentralisation and question the need for Trident and the Labour Left sees the approaching fiscal squeeze as an historic chance to reopen broader debates about defence spending, identity cards, prisons and so on. This debate is all to the good. In fact, an ideal combination of spending cuts would include ideas from all these programmes, as well as many that no party has yet dared to mention — including reductions in civil service pensions and in labour costs in the NHS, which has moved from paying some of the lowest to some of the highest salaries in the world.
The alarming feature of this debate about public sector cutbacks is that the Government is refusing to play any part. Instead, the Prime Minister has decided on denial and self-deception. This is not just cynical but doomed to failure, for at least three reasons.
The first is that a big cut in public spending, if carefully prepared and explained to the public, can win votes, rather than lose them. Mr Brown has convinced himself that the banking crisis and recession have tilted the balance of public opinion in favour of the State and against the private sector. But this judgment is probably wrong. The sacrifices inflicted on private sector workers — wage cuts, redundancies and pension losses — have intensified resentment against public employees and welfare recipients, who are sheltered from such pressures. To make matters worse, antagonism against bankers has spread to the public sector after the MPs’ expenses scandal and government misjudgments such as the £10 million pay package for the chief executive of RBS.
Second, Mr Brown’s evasion on public spending gives the opposition parties a simple and convincing narrative to attack him with. It is easy to explain why spending cuts are both inevitable and fair: protecting the public sector from the ravages of recession may have been the right policy from 2008 to 2010, since it prevented an even deeper slump. But once the recession is over, common sense and fairness all dictate a reversal of this relationship: as private employment and wages expand after the recession, government wages, pensions and employment should be cut. A rebalancing of the economy from public back to private spending is what every school of economics recommends after 2011.
Mr Brown’s third miscalculation is his belief that voters will be more frightened by Labour warnings of “Tory spending cuts” than by Tory warnings about Labour tax hikes. Most voters pay taxes — and will be eager to protect their hard-earned incomes from the taxman after the recession. By contrast, only a minority work in the public sector or subsist on benefits. If the Tory manifesto promised to cut government pensions, wages and welfare benefits, while limiting tax increases on the private sector, this would win, not lose, votes.
Mr Brown apparently thinks he can win the next election by emulating the Tory campaign against “Labour’s tax bombshell” in 1992. But he has, as usual, drawn the wrong lesson. Mr Brown has convinced himself that the Tories won in 1992 by lying about Labour’s tax policies — and that he can now do the same about Tory cuts in public spending.
But the truth is exactly the other way round. The Tory claims about Labour plans for tax increases were true — and so were Labour’s claims that the Tories would squeeze public spending. So true, in fact, were the Tory claims about a “tax bombshell” that they themselves had to implement big tax rises from 1993 onwards. The 1992 election did not show that parties can win elections by lying about their opponents’ plans. Rather, it suggested that voters in a recession tend to support the party that is likeliest to limit tax increases after the recession by keeping public spending under tight control.
That public spending will have to be reduced once the recession is over is a simple story to tell, and an economically sound one. In contrast to Mr Brown’s denials and deceptions, it also has the advantage of being true.” (Anatole Kaletsky, The Times). http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6619992.ece
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