The Coalition’s economic strategy is taking shape. There are some great aspects to it. There are other parts which are less so.
It makes total sense to address the excesses of public spending. The State has become far too large. There are too many employees. They are overpaid and have ludicrously generous pensions and benefit packages. Not to mention that everything they buy appears to cost three times more than it should, and the quango tendency increases costs. Getting the State into the right shape will be an enormous long-term advantage to Britain.
Before the election, columnists said that no one would dare to tackle the entrenched and powerful position of State Sector Unions, either Conservative or Labour. They may have been right, but what no one foresaw was the Liberatory Coalition, which provides the perfect political cover story for doing what needs to be done about State Spending in Britain. No one expected a cross-party alliance which would tackle state spending head-on.
It is the number one drag on our economy and society. It has both quantitative aspects in that far too much money is required to feed the beast, and qualitative. How come in years when state spending has doubled as a total inflation-unadjusted figure (1997-2010), services have been progressively eroded? The reason is no doubt that Brown saw the State Sector as a Gordon Brown-voting machine. Undoing this leviathan has to be the number one priority for any government that wants Britain to return to economic health.
Osborne is setting about cuts in spending levels in some departments at a rate of 25% and is wondering if nearer 40% would be possible. This is wonderful to behold.
BUT GOVERNMENT SPENDING IS SET TO RISE
Curiously total projected government spending is set to rise 10% over the next five years, partly as interest payments are assumed to be rising in Osborne’s calculations, and maybe because the true figure of state spending was no doubt being heavily disguised by Brown and Darling before the election. The December 2009 Treasury Spending Outturn Report figures seem obscure in the extreme with £180 billion’s worth of unexplained accounting adjustments.
The fact is that Osborne is taking this on is marvelous to see. He has to strike while he is in a position to do so, and sort the State Sector out not just for this year and next, but for the longterm future. By doing this, he, at a stroke, will change the country’s future growth prospects entirely.
But he will soon find that he has made two errors in his thinking, or that there are possible changes that he could think about, as the situation unfolds. There is a severe danger of a nasty recession.
Instead of borrowing and spending, people are now saving hard, fearful of their debts and of possible unemployment. 7% of household income is being saved in advanced countries worldwide (Financial Times). Previously debt was being taken on by consumers, and household saving was in negative territory, but there is now a huge fall in demand taking place, unseen for two generations. In America deflation is kicking in. In the UK inflation, much of it taxation-induced as with petrol(Gasoline), is falling.
While Osborne is doing the right thing for the longterm by resizing the State, in these market circumstances, he is doing the wrong thing by raising taxes on an already unwilling consumer.
Where he will have more leeway than he thought he would, is in his borrowing costs. Government debt in all advanced countries is rising in value, which makes borrowing cheaper. As savers save (£200 billion in Britain alone this year – Martin Wolf FT), and emerging economies look to protect their trading gains (reserves rising by $1 trillion a year), they are not currently seeking risky assets like shares and commodities. They are hunting safety, and the safest place to put money is lending it to governments of the advanced countries. For this reason, advanced country government funding costs are tumbling.
Ignore the fantasies of gold bulls and other doomsday merchants. Government debt has risen in value 5 per cent in a month, presenting the Bank Of England with a £10 billion profit on the gilts it bought last year. There is a lot more of this to come.
10 Year money is currently down to 3% p.a. In another few months, this could well be 2%. Osborne could then easily afford to borrow more to stop the economy hitting the buffers, as the rate is half what he has budgeted for.
A nasty recession could needlessly destroy businesses which will do well and provide the country with healthy revenue once the next couple of years is behind us. In short, as well as looking at spending on infrastructure, he should not be raising VAT and CGT.
He should have left VAT at 17.5% or even cut it to 15%, and price consumption back into the market. He should have left CGT at 18%. He should also cut Corporation Tax further faster, and make Britain competitive with Ireland, Singapore and many others.
He could easily cover the borrowing in the next two years without raising taxes, if he cuts the size of the state. His reward would be a bigger economy, and faster growth in the years ahead. This is a major opportunity, which ought not to be missed. It’s the opportunity to redesign an economy entirely which only comes at times of deep recession, as we are in now.
It is a shame that as we go on a badly-needed diet State-spending-wise to fight the flab, we give up on our muscle-building private sector at the same time. We would be healthiest if we eat less in state-spending, and develop stronger muscles by getting the private sector into robust health at the same time. This Osborne could be doing.
CROSSRAIL & ISLAND AIRPORT – INFRASTRUCTURE SPENDING
If longterm interest rates and government borrowing costs hit the floor, as they will do, in six months or a year’s time, and if, by then, Osborne proves he has State spending under control, it would be the perfect time to let Boris Johnson loose and trigger the Crossrail and Island Airport projects, making London into the biggest building site in Europe, transforming our infrastructure. There will never be a better moment, where a, it can be afforded, and b, the economy needs the boost large projects would give. There will be many hungry contractors. Commodities are falling in price. It will never be cheaper.
With government finance, shortly to be costing around 2% per annum, (not the 4% Osborne has planned on) compared to Gordon Brown’s 8% PFI costs, the government can afford to fix the capital spending requirements of the country for two generations, and pull us out of recession to longterm advantage.
Osborne could at the same time, have a review of the costs of PFI contracts already in existence. The rate of 8% p.a. was promised to PFI financiers for 30 years by Brown, many of whom realised that their good fortune could not last and they have sold on their businesses to secure their gains. The 8% rate of return could be renegotiated to 4 or 5%.
SUGGESTED GOVERNMENT STRATEGY
There is so much more that Osborne could be doing. They say that politics is the art of the possible. These things are all becoming possible, if only the Liberal Democrat ‘fairness’ problem can be dealt with. It will be a lot fairer on everyone if our economy is not sent crashing into an unnecessary recession. Tell Vince Cable, please. The government should do the following –
1. Prove to world markets that Britain’s state sector spending is under control.
2. Cut taxes within months.
3. Start infrastructure spending within twelve months, as 10 year interest rates hit 2%.
Now come on, Vince. Let’s do it. We’ll never have a better moment.
These are also huge political opportunities for when Cameron’s honeymoon starts to wane.