Most of the debate about the government’s strategy has concentrated on the possibility that they are “cutting too fast and too far”. Few worry that spending is still increasing in cash terms, and may prove difficult to finance.
The government plans to borrow an extra £485 billion over five years, if all goes well. It might not.
It is quite possible that growth rates will be lower than the forecasts. We have seen that the OBR had to revise its growth forecast down at the time of Budget 2 compared to Budget 1 from the Coalition. Many think it will need to revise it down again for the current year. Mr Chote of the OBR has now said as much. My worries have always been more about years 3-5, when the forecast assumes well above trend and well above past average growth, sustained for three years. If this does not come about, tax revenues will not surge as advertised.
When I last reviewed the position I suggested moderately that the government might experience £25 billion less tax revenue, and incur £25 billion more spending over the next four years than planned. This would take total additional borrowing up to £535 billion, well ahead of total UK state debt in 2004. After all, there was more than £30 billion of slippage in total deficit reduction for the Parliament between Budgets One and Two. As the world economy enters the doldrums, as the US slows and emerging economies seek to cool down, it is possible the global growth prospects will be worse than expected, leading to a further shortfall in revenues.
I would have preferred the government to have imposed a freeze in public spending in the first year, instead of allowing a 5.3% increase un current spending. That would have have lopped more than £16o billion off the borrowing over the full five years, giving the government more leeway. I would have pencilled in larger cash increases in spending for the second half of the Parliament than currently allowed, leaving extra total borrowing still well down on the government’s plan .
I would have imposed a strong control to use natural wastage in all but front line public service roles, to cut staff numbers more rapidly without the need for redundancy payments. This would yield good savings for the second half of the period. As my recent PQs have started to illustrate, the government has been hiring as well as firing.
My advice to the government today is to seek to bring in total public spending this year with a lower rate of increase than in the budget. More savings compared to budget this year can be multiplied by four to achieve good savings on the amount of extra borrowing over the complete Parliament. It would also leave more of a cushion in case revenues disappoint, or in case extra spending is needed in crucial areas in 2013-15, as may well be the case. It would still be a good idea to use most of the natural wastage available in administration and non core services.
In recent months the government has rightly highlighted the very favourable low borrowing rates it has achieved by talking about serious deficit reduction. In order to extend and protect those low borrowing rates, the government needs to show its deficit reduction strategy is hitting the targets. That requires more to go right, both in controlling spending and in faster growth of revenues. The danger of the strategy is not that they have cut public spending too much, but that they are still spending more than the country can afford. Markets can change their minds. It is important not to give them a reason to do so.