Many governments have run out of road to borrow more money. Ireland, Greece, Portugal, and now Spain and Italy are having to rein in their deficits owing to the reluctance of the markets to lend to them. France is undertaking pre-emptive cuts to avoid a run against her bonds. The USA is now into cuts and deficit reductions owing to political disagreements about how much more the US can safely borrow, against a backdrop of the downgrade of the US credit rating by one agency so far. The Uk is one quarter of the way through a five year programme of raising tax revenues to cut its deficit.
All these governments have overspent substantially, or have inherited a situation where past governments have overspent massively. All seem to find it very difficult to control spending, to discipline their want list, to raise public sector productivity, to buy well and to motivate their workforces. None of them embark on their financial turnrounds in the energetic way a company determined to survive would do.
In the UK there has been much talk of cuts. There have been some unpopular cuts, especially at local level, and some unpopular cuts are pencilled in for future years. Meanwhile total current spending continues overall to rise strongly, up 5.3% in cash terms and up in real terms in the first year of the turnround strategy. There are some curious features of the progress so far:
1. The civil service and quangos have continued recruiting to replace some of the people leaving. I am still trying to get up to date figures from departments, but it is clear they are not getting anything like full benefit from natural wastage and from the redundancies they are making rather expensively.
2.The government still presses ahead with expensive new programmes like the payroll computerisation scheme. It is wedded to increases in spending in areas like the EU budget and overseas aid which means less to spend elsewhere. It is still fighting two wars in the Middle East, at some cost.
3. The government has not managed to get its two main banks where it owns subsatntial shareholdings into overall profit, and is subject to delay on much of its asset sales programme which could otherwise raise cash and cut future interest payments.
4. It has delayed raising the retirement age and altering the terms of a wide range of generous public sector pension schemes, delaying the time when these will all be more affordable for taxpayers.
5. Mr Cable’s student fee plan entails higher public borrowing in the early years to advance to the students.
6. The UK has borrowed extra money to advance to the IMF , and certain Euroland countries directly or via the EU.
As revenues are likely to disappoint as a result of lower growth, the government needs to do all it can to control spending whilst not damaging core services and front line personnel, to keep downwards pressure on borrowing levels. Avoidable or nice to have items should be deferred.