However you look at the UK state’s finances, any rational person has to conclude the Uk state is spending too much. Labour and Conservative governments have in the past found that 38% of National Income is about the maximum level you can impose in taxes. Try to get it higher and rich people leave the country to avoid Income Tax, people stop selling assets at profits to avoid CGT, they drive less to avoid fuel duty, they spend less because their incomes are squeezed leading to less VAT and the rest.
This means that the long term rate of spending has to be lower than today’s. Even allowing for the current state of the cycle, it would be unwise to continue spending at current levels on a sustained basis. Of course the best way to get to these lower levels is through growth, avoiding painful cuts in spending. However, growth is elusive, and some action does need to be taken on the spending side.
There are four main ways of cutting current spending. The first is to idenify things we are spending on that we do not need, we do not like, or can be put off for a bit. In this category I would choose cuts to Overseas Aid for the time being until we have recovered the fiscal position. I would withdraw our troops from Afghanistan and Germany with no new foreign military adventure for bit. I would cut the large subsidies being paid for green energy, as we need to get energy costs down . We should slim down the programme of industrial and business subsidies and the costs of the Business Department, as Dr Cable proposed in opposition when he suggested scrapping it. We should negotiate a new relationship with the EU as we cannot afford our current membership.
The second is to manage necessary programmes more effectively. Welfare is a case in point. I do not want to take money away from the disabled. I do want to change future eligibility for benefits. We should say to new arrivals in our country that they have no entitlement to benefits for a period of years, until they have built up some contribution record under National Insurance. We should invoice health tourists seeking treatment for non urgent conditions on the NHS. I am pleased to report the government is going to limit entitlement to subsidised housing, to make sure it goes to deserving people who have been here on a waiting list. Mr Cameron announced some welcome moves in this direction yeasterday, but may need to go further.
The third is to have a drive for greater public sector efficiency and higher quality at lower cost, something that industry does every year. I have highlighted here before the excess equipment bought and not returned to the NHS. The stock levels in many public sector organisations are very high. A period of destocking would cut inventory costs, reduce wastage and write off by encouraging earlier use of stocks, and reduce storage and warehousing costs. The digital revolution should be more strictly applied to clerical tasks in the public sector. Capital spending should mainly be allowed only where it makes a recognisable contribution to lower cost and higher quality service. The gross inefficiencies of the nationalised rail network need to be tackled more radically, to cut the subsidy.
The fourth is to find assets and activities which can be transferred to the private sector, releasing money to the state. I would start by breaking up RBS and selling the pieces to the private sector.