The statement yesterday from Mr Cameron that cutting deficits was difficult was taken by the media as a sure sign that the government will report slippage in its programme of getting the deficit down. The FT led with the view that it will now take well into the next Parliament to eliminate the stuctural deficit. I doubt they would have written that without good sources telling them.
This is a defining moment. It is such a contrast with the stalwart recent performances of junior Treasury Ministers in the House and on TV saying that the government intends to eliminate the structural deficit this Parliament. This, after all, was said to be the fundamental point in the Coalition agreement. This was the priority which they just had to achieve to stabilise the economy.
I have been arguing for 18 months two main economic points. Firstly, I urged the Coalition to curb public spending plans in the first two years when they needed to. Their unwillingness to do this was always going to make getting the deficit down in due course more difficult. They needed a lower cost starting point. I suggested a spending freeze in Year One, instead of the 5% increase we got. This would have created a lower base for the subsequent years, when the same percentage increases could have occurred as planned by the government. It is always a good idea to get the bad news out of the way at the beginning of a recovery programme. You can carry people with you more easily if there is just one difficult round of changes. This would have saved £150 billion over the five years, making the borrowing amounts more sustainable. They could even have increased spending a bit more than planned in the last two years on this model.
Secondly, they need a growth strategy, which has to centre around sorting out the banks, and cutting costs on business through regulatory and tax changes. Dealing with Northern Rock and creating a new banking competitor in the North East will help at the margins. Sorting out RBS is more fundamental, as it is many times the size of Northern Rock.
The government will probably claim that much of the extra borrowing they now need to write into the accounts comes from lower growth. They always said that they would use the fiscal stabilisers. Any lower growth rate brings less revenue and more spending. They will borrow to cover that. It makes the briefing that they also plan to delay correcting the structural deficit by say three years more difficult to grasp, as that will mean more borrowing on top of the extra borrowing to take care of the cyclical disappointments.
It probably means they are expecting more quantitative easing. The only way they can hope to keep the cost of borrowing down is to lend to themselves by money printing and through the bond merry go round. The government sells a new bond to the private sector, who sells a second hand bond to the Bank of England. Private sector buyers of UK government paper will be concerned to read of the delays in the much advertised deficit reduction strategy.
The truth is the deficit needs to be brought down. To do that they need to spend less. When I helped lead the turnround of a near bankrupt company we had to take strong action at the outset. We did, and it worked. We saved most of the jobs and created a good business. At the beginning we had to stop all capital expenditure, We stopped all purchasing unless we had completely run out of the items concerned so we could destock rapidly, saving cash. We had to cut costs everywhere. We were particularly tough on new hiring. We could not afford any external consultants.
The government needs to get a stronger grip on its spending. It could stop all new hirings, other than valued professionals like nurses, doctors and teachers. It could speed up its reduction of quangos and the administrative overhead. It could spend less on external consultants, as recent MOD disclosures have shown. It could cut the number of new projects until it has better control on spending levels. It could defer the new high speed railway. It could delay rises in overseas aid. It could go back to demanding a better EU budget deal for the UK. There are many options for cutting the rate of increase in spending.
If we are going to have the language of public sector austerity it would be wise to have the reality as well. The government was right to say it needed to cut the deficit by cutting spending. The issue remains how.
I forecast some time ago on this website that lower growth was likely. This I thought meant that instead of borrowing £451 billion extra over 5 years (June 2010 Plan) the government would borrow £520 billion, with the possibility it might end up borrowing more. It seems possible from the tone of the press yesterday we will be at least at £520 billion in the Autumn Statement.