On Wednesday the BBC asked me their usual economic questions. Have the cuts been too deep and too fast? Are the cuts now leading to slowdown in the economy?
It is quite difficult dealing with this. People who presume to comment and question on their favourite subject of public spending should at least read the numbers and try to understand the facts. I explained yet again, patiently, that current public spending was boosted by £37 billion in the first year of the Coalition government, and is going up again this year. In perfect neo-Keynsian or Labour mode, every penny of this additional spending will be borrowed. Even allowing for inflation, the first year saw a real increase in current spending. So should the second year, if the government imposes the pay freeze it is talking about.
I do not dispute the economic slowdown. That is very clear from the numbers. The question the BBC should be asking, is why has there been such a slowdown when the government has boosted spending, and is borrowing so much? The BBC interviewer politely implied I was talking nonsense about the figures, when he clearly had not read them himself. He could not handle the facts nor see they required a different question.
It is interesting to see how such a large fiscal stimulus achieves the opposite of what is planned. Last year the state borrowed an additional 10% of GDP for its own spending. This year very high levels of borrowing are continuing. The Chancellor’s second budget promised a larger fiscal stimulus than his first. Despite this – or because of it – growth has slowed right down.
The reasons are simple to grasp. Every pound the state borrows to spend has to be taken from the private sector who lends it.The private sector can no longer spend that same pound.
The private sector sees that the state cannot go on borrowing so massively for ever. Companies and individuals learn to expect tax increases to pay for the extra spending in the future. That damages confidence and puts them off spending and investing.
The extra spending has been used in part by the state sector to fuel inflation. As public sector costs and wages rise, so there is a further twist to the high inflation the UK suffers from. This helps cut private sector living standards and reduces discretionary money to spend.
So the fiscal stimulus, huge as it is, fails to deliver faster growth. It can become self defeating. The right response is not to increase the fiscal stimulus. If something does not work the first time, there is no reason to suppose it will work the second time if you do more of it.
The government are right to say they need to get the deficit down. They need to do much more by increasing public sector efficiency and value for money. They also need to cut out quickly those parts of the public programmes that are less desirable or less essential.
The strategy always rested on private sector led growth. They need more of this, as we have been discussing in recent blogs. There was a large fall in public sector employment in the recent figures, but the state sector still employs more than 6 million people. The government needs to use natural wastage to cut numbers more. If the pay freeze disguises further pay rises, then fewer people can be afforded in the public sector.