There have been two types of government economic policy. One set of policies has tried to delay the inevitable adjustment to a world of lower borrowing. The other set is starting to cut living standards, as the government tries to stave off a worse financial crisis.
Money printing was designed to delay the adjustment of the public sector. Cheap money flowed to the government, so the public sector could carry on recruiting and paying generous wage and salary increases to many. Public budgets were padded,the range of benefits increased, and numerous temporary schemes deployed to seek to keep people off the lists of the unemployed for a few months. The VAT reduction, the car scrappage scheme and many others were time limited. Banks were propped up in the most expensive way imaginable, saddling taxpayers with huge debts and risks. They were lectured to lend money to the private sector, but their Regulator told them to rein in their lending to anyone other than the government.
Meanwhile, a large devaluation slashed all our living standards, making imports dearer. It was most visibile in the increases in petrol, heating oil, gas and diesel prices. It is fuelling the current rate of inflation, which is far faster than most private sector wage increases. Keeping money tight in the private sector drove more into bankruptcy and unleashed a wave of redundancies especially in manufacturing. Now we see the beginnings of the Labour squeeze on the public sector, with the cuts in university funding, and the announcement of zero wage increases for local government from April 2010.
With public spending representing around half the total economy, and with a government wishing to halve the deficit running at 12.5% of National Income, the prospective government squeeze will be a big cut in living standards unless they can generate some offsetting growth.
To do that they need to cut taxes on job creation, business and entrepreneurship. They need to make the UK the best place in Europe to make things and to run services. They need to strengthen competition policy to open up market opportunities, and deregulate to make it easier to set up and run a business. If they don’t, their target cuts will take a big bite out of average living standards. If they don’t cut public spending, markets could take an even bigger bite out of our living standards, as they are doing to Greece, and have done to Ireland.
I have been out and about speaking about the crisis over the last couple of days. I find it easiest to compare the national budget to a family budget. It’s the comparison that the government seems to fear most, as it is the most obvious. We all know that if we have overdone the credit card, have a big mortgage and lots of hire purchase, paying all the bills becomes difficult, and could become imposssible. You have to rein back on new spending and pay off some debt. It’s the same for a government. The bank manager is the financial markets. They will only put up with so much. The clock is ticking.