Cuts, Debt, and the Future of the British Economy

It’s been a whirlwind week in British Politics – the Chancellor delivered on his commitment to deliver a comprehensive review of UK public spending on time, the future of our Armed Forces in the framework of our cash-strapped economy was unveiled, and a man who admitted to knowing nothing about Economics shouted about some inaccuracies in a budget announcement that had already happened 4 months ago.

But it wasn’t just the former Union-Leader-turned-Shadow-Chancellor making noises about the spending plans. In the spirit of working together for the national interest, his old friends and party backers are proposing ‘French-style protests’ and mass strike action against the cuts (while claiming straight-faced that the cuts, not mass strike action, will be what stifles economic growth) and of course some members of the public are also apprehensive about the future.

Amidst the furore, I think it’s really important that we pause to take a more pragmatic look at what the cuts mean, and what public spending is really all about.

What is it about public spending that’s so important? As a student of economics, I do have to concern myself with spending in its own right; the figures, the effects, the analysis. But this isn’t (or shouldn’t be) this which makes people take to the streets. For most people, public spending is a means to an end; it’s about services, jobs, and how it all affects our quality of life.

It’s understandable why people don’t like the idea of forgoing the services we care about as a result of spending cuts – as Conservatives we’ve seen things shelved that we’ve cared about for years, and we can all be rightfully angry at Labour for their 13 years of profligacy that once again put us in this desperate position. However, more vital is that we spare a thought for the services we’d be forgoing if we didn’t cut now.

Think for a moment what we could do with Forty-three billion pounds this year. It’s an almost incomprehensible figure, so to put it into context, Educating our young people costs just £63bn, and our entire defence budget is £38bn. With that money, we could lift 11 million more people out of paying income tax or stop all businesses from paying corporation tax altogether. Just imagine how far it would go towards higher education.

But we can’t use it for any of these things. Instead, that £118 million pounds every day will be spent just on paying the interest on our Trillion pound national debt. And that still doesn’t make it go away. In fact, every day it gets worse. Every day we wait, another school or hospital or motorway or policeman or helicopter for our brave armed forces is sacrificed, be it now or in years to come. This is the shame of the Labour Government, an appalling affront to the people of this country, and we cannot let it happen for a day longer than we have to.

But what of the economic claims that cutting spending will doom our recovery and plunge us back into recession? Well let us remember that back in June, the emergency budget took fast, decisive action including significant cuts to the unaffordable spending left by the last chancellor. All basic theories would point to a fall in growth, but what happened? Confidence rose, consumption grew, people started investing again, and all growth forecasts had to be revised up. The world saw that we were taking action, and economic cataclysm had been narrowly averted, and the UK economy bucked the trend.

And once again, leaders of the UK’s biggest businesses, potential investors from around the world, and most credit rating agencies and international organizations have come out in support of our actions. Arnold Schwarzenegger even went as far as to say he wants to follow our lead in tackling California’s deficit.

I’ve  spent a while trying to think up a good analogy for this whole business, but my favourite remains one a friend of mine said a few days ago, likening the cuts to pulling off a sticking plaster. We can either pull it off slowly, drawing out the pain until it becomes unbearable, or else we can brace ourselves for the worst, rip it off, and find it’s really not as bad as we’d thought. One thing’s for sure, once the plaster’s off and the economy can finally breathe the air of free enterprise once more, the wound left behind by the last government will heal in no time.

Owen V. Williams

BUCF Publicity Officer 2010/11

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About vwozone

BUCF Publicity Officer 2010-11, re-elected in new role of Publicity and Media Officer for 2011-12, and BUCF Vice President since May 2012. Conservative Party candidate for Selly Oak ward in Birmingham City Council elections 2011.

25 thoughts on “Cuts, Debt, and the Future of the British Economy

  1. Personally I’d say ripping off a plaster is worse, but that’s just me, lol! Another analogy the Coalition have tried to use but has frankly been turned on his head. The idea that the last government “maxed out on the credit card” & “the budget is like a household budget & that you can’t spend what you don’t have”. But, if a household goes into debt, what do you do? Do everything you can do to get rid the debt? Sell everything in the house, the TV, the furniture? Or rather tighten your belt & pay the debt off bit by bit? I know which house I’d live in. Oh & I distinctly remember consumer & to a lesser extent business confidence hitting an all time low.

  2. “Think for a moment what we could do with Forty-three billion pounds this year.”

    Are you seriously suggesting that this Tory government intends to eliminate the national debt or reduce the gilt edged bond-yield to zero as a means to abolishing interest payments?

    Perhaps you would like to consider that interest payments are roughly the same share of GDP as they were in 1997, helped greatly by lowee interest rates.

    “Well let us remember that back in June, the emergency budget took fast, decisive action including significant cuts to the unaffordable spending left by the last chancellor. ”

    There are important time lags at work. Apart from anything else the figures that showed growth of 1.2% refer to the second quarter of 2010; before the emergency budget. I doubt that we are heading towards a double-dip recession but these cuts will definitely hinder any recovery. The figures for Q3 will be published on Tuesday and I’m hoping for the best.

  3. Most of the debt increase has come in the last 3 years, as the debt was only around £400bn in 2007. The rest of that has come from bailing out the banks and decreasing VAT to try and keep spending up.

    So I’m assuming that the Tories would have let the banks go bust and wouldn’t have tried to stimulate the economy by lowering VAT? Otherwise they have no reason to moan about the debt.

  4. ‘They have no reason to moan about the debt’?

    I think they do. The government is now having to make some of the deepest cuts since the Geedes Axe, mainly due to the last government’s incompetence.

  5. It’s not the level of declared debt which is the problem (estimated to understate the real picture by several trillion thanks to PFI, unfunded pensions etc), it’s the actual debt and even more worrying the speed at which it is rising – i.e the deficit.

    Jack doesn’t seem to have noticed that since the new government came to power interest rates have plummeted in absolute terms and relative to other countries debt interest, thanks to us restoring the market’s confidence in our government’s fiscal competence.

    The Conservatives have done exactly what we said we would and more. Not only have we protected the NHS, certain benefits such as the winter fuel allowance that Labour lied we would remove, but we have managed to protect the education budget whilst delivering on the most important promise – to tackle the deficit.

    Let’s let these idiotarians continue to argue against what we are doing. Polls show that a clear majority of the public believe that we need to tackle the deficit and that it’s Labour’s fault that we are in this situation.

  6. So what part of bailing out the banks and stimulating the economy with a VAT cut was incompetance? It’s easy to blame Labour, but that’s just cheap sound bites with no actual alternative put forward.

    Are the Tories saying Labour were incompetant in saving the banks?

  7. Mark, nothing about their response was particularly incompetent, it was just their failure to monitor the principal banks throughout their period in office. Through the institutional framework established in the late 90s certain banks were allowed to engage is high risk overseas investments. It’s now fairly clear that no one had a clue what was going on.

    Having said that, they’re response wasn’t especially inspired either. They had little option but to prop-up the banks.

  8. Daniel, if “nothing about their response was particularly incompetent,” then why was it doggedly opposed when the rest of the world agreed? Your honestly going to say that to let the economy take course to which Gideon and DC were arguing would have prevented a global economic meltdown and years of depression. And yes Labour didn’t monitor the banks enough but in all due fairness Gideon was calling for greater deregulation prior to 2008.

  9. It’s not that Labour didn’t monitor the banks enough, they didn’t monitor them at all. Unlike the Bank of England which previously regulated the City, the FSA was a flimsy check on banking
    practises. I have no doubt that previous Bank of England chairmen like Eddie George would have known the balance sheets of principal banks like the back of their hands and would have pulled misbehaving banks into line.

  10. Banks banks that. Although it’s always tempting to point out that only the UK had a banking run, the idea that the deficit is anything to do with banks or bankers is a Labour smokescreen.

    The deficit is caused by the last government spending more money than they raised. That’s the government’s fault.

  11. And so did nearly every other country on the planet. They’ve all got deficits because the banks messed up, and I’m sorry to say this but it was the banks, but if you want to keep deluding yourself so be it, but try telling your argument to nearly every single nation-state on the planet.

  12. In fact both parties were to blame.

    Certain banks such as Northern Rock and RBS were profoundly reckless. They purchased investment packages on the international markets, high risk and to some extent ambiguous.

    However, at the same time the government were profoundly complacent. The institutional and regulatory framework established by the last government failed.

    Also, coming back to the government’s handling of the crisis once it broke, encouraging Lloyd’s Bank to buy RBS wasn’t such an inspired idea was it?

  13. Maxattacks – the fact that the unsustainable rises in bank lending was the only thing preventing a full-blown recession from 2003 onwards is clear and well documented. It was our government which failed to prepare for the predictable (having abolished boom and bust *rolls eyes*) by building up surpluses in the good years and reining in the obvious excesses. Think the Australian approach.

    Northern Rock and RBS were reckless but were only accountable to their shareholders.

  14. Ok, I’ll agree with Daniel here, the framework was not satisfactory enough, but like he says, it would have been the same under either two of the main parties. But as (I think) Jack Matthew points very often out Brown produced more surplus budgets than any other post-war Chancellor. But the simple fact is that the crisis started in America, the UK however highly we may regard it, could not have caused this crisis whatever the government and equally prevented the effects fully from effecting the real economy.

  15. While the government didn’t cause the crisis, they did take away regulatory oversight from the Bank of England and give it to a relatively inexperienced body.

    Most bankers who have been in the game for a while will tell you that through it’s formal and informal relations with banks, the central bank knew the practices of the sector (and malpractices) inside out. Due to its position as the ‘banker’s bank’ it could also pull rank, isolating banks and other financial institutions it considered bad apples. The FSA, in contrast, had little knowledge and few teeth.

  16. PT, I have already explained the issue of PFI (which began in 1992 under a conservative government) to you several times and I’m not going to insult anyone else’s memory by repeating those explanations here.

    You describe these extra liabilities as undeclared. If you want them to be declared then ask your own front bench?

    “the speed at which it is rising – i.e the deficit.” It’s the Debt/GDP ratio that matters and that depends on more than the deficit.

    The bond yield was extremely low under Labour and this all reminds me of your references to the Irish economy: Celtic Tiger as it was known. Do you have any more to say on that now that the ‘Celtic Tiger’ is little more than a fireside rug?

    “The deficit is caused by the last government spending more money than they raised. That’s the government’s fault.”

    In the good years of 1997 to 2007, the Labour government kept the deficit lower than it had been in 1997. And why did David Cameron commit to keeping those Labour spending plans until 2008? Was he at fault as much as the government? Yes or No?

  17. Jack – whether PFI, pension deficits and other liabilities which private companies would need to recognise in their books are declared or not is immaterial to whether they exist. These are future obligations based on past events and therefore are part of our debt and should be included in any comparison between countries or across time.

  18. Most future obligations should be considered as future transfer payments and the conventional measure of UK debt is consistent with the 1995 Maastricht accounting practices. Further, we should in that case also make relevant adjustments for other nations such as the inclusion of provincial debt in Canada. If you want the government to tear up the Maastricht Treaty you should lobby your own foreign secretary; he might be quite sympathetic.

  19. I agree with substance over form. As I said on my previous post the declared debt irrelevant as far as I am concerned. It is the actuality which is important.

  20. I have just explained to you that projected transfer payments and future spending commitments are not debt. This is not a complicated concept.

  21. Are you a chartered accountant?

    Future liabilities based on past service (i.e. public sector pensions) would be recorded on the balance sheet of any private organisation. This is now the third time I have said it for the hard of understanding, but the technicalities of why the same items are not recorded in UK plc’s books are irrelevant.

    Allow me to help you further.

  22. (It’s interesting to see that when you post links and imbed videos it is promptly approved while mine aren’t.) The rather tacky video above fails to compare like with like. It ignores the public secotor liabilities in existence in 1997, but then so do you, so at least it’s consistent.

    A business and a country are not the same thing. Pension liabilities depend on retirement age changes and other considerations. And future obligations should not be included as debt; no more than we should have ever included North Sea Oil revenues as ‘future public assets’.

    Even if we make the adjustments that you desire, it does little to undermine the international comparisons that I made, as similar adjustments would have to be made overseas.

  23. This excellent video was presented by former civil servant Mike Denham of the well-respected ‘Burning Our Money’ blog and makes a like for like comparison between 2000 and 2010. His analysis concludes that the real national debt has increased in that period from 2.3 trillion to 7.9 trillion.

    Your assertion that future obligations should not be included as debt is ridiculous. That is what debt is!!! Let’s consider three types of liabilities.

    1. Government bonds repayable in a year
    2. The next annual instalment of a PFI capital repayment related to a hospital which has been built.
    3. The actuarial value of a public sector pension of a teacher who has just retired.

    Are these all real liabilities or not? How do you differentiate in your mind?

    International comparisons have some meaning, but my main point is that debt is not historically low in the UK. I think I have succeeded in making that point.

    NB – Leaving aside your apparent misunderstanding about when an asset or liability crystallises – and can therefore be recognised – since when has North Sea oil been a publicly owned asset?

  24. “Your assertion that future obligations should not be included as debt is ridiculous. That is what debt is!!!”

    In that case the severence pay of every public sector worker should be included as debt at the very least. The government has the option of either keeping a worker on for another year or sacking him/her. Either way the governemnt has a financial obligation to fulfill. Does that really qualify as debt? In assesing previous levels of debt we could also throw in other obligations such as our previous NATO commitment to raise defence expenditure by 3% a year in real terms. Should that have counted as debt in the debt figures for the 1970s?

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