OECD urges bold cuts to public expenditure

June 30, 2009 11:54 AM

The Organisation for Economic Cooperation and Development (OECD) gave its strongest line on the OECD_grey_logo UK's fiscal problems yesterday, urging the Government to return to "credible" spending plans.

In the context of Lord Mandelson's admission that the Government would not be holding a spending review before the election, the OECD's 'Economic Survey of the United Kingdom 2009' is something of a rebuke of the Government's "we will spend our way out of trouble" approach; (albeit an unintended criticism).

While the preamble limits itself to the observation that delivery "of the consolidation [plan to fix the public finances] will require specifying the “value for money” savings beyond 2011-12 in the upcoming Spending Review," the OECD later makes little effort to disguise the fact that the government's determination to
increase investment in public services despite the downturn is largely responsible for the country's budget problems. Action to cut public expenditure must be bolder and more specific, with  "explicit targeting of programmes for expenditure cuts and temporary
revenue-raising measures"
to reduce the high debt levels".

It also recommends bringing an end to the (fairly scandalous) practice of hiding PFI and pension liabilities "off balance sheet"; these, along with the debts of the nationalised banks, should be considered in the setting of public debts targets. New fiscal rules should also be introduced, to replace those suspended by the 2008 Pre-Budget Report. There might be a role, the OECD suggests, for an independent fiscal authority to assess
whether the government was sticking to its spending rules (BBC website). In other words, the OECD is recommending bringing in the IMF. This is what bankrupt countries do, what the UK was forced to do in the 1970's, what Latvia and Turkey have done in recent months.

Unemployment is predicted to rise to 10%. The OECD also last week revised down its short-term outlook for the UK
economy, to a contraction of -4.3% this year, worse than the
government's forecast of -3.5%. Gloomily, they suggest that even if the moves to stabilise the financial system work (which is not yet certain) growth could remain well below trend, as households and firms rebuild their balance sheets. On that financial reform, the OECD makes warm noises about the potential benefits of greater European engagement, and note a continuing "unhelpful conflict" between the Bank of England and the FSA. It argues that "it is difficult to reconcile the overall
macro-prudential objective within the structure of two independent
institutions,"
and suggests linking them more closely through a joint
board with the final authority to take action. The Government is due to publish its plans for financial regulation soon.

What, one might ask, does this OECD report tell us that we don't already know? Nothing really. The media and opposition parties are doing a solid job (for now) of exposing the Government's national recovery 'plans' for what they are - pie in the sky - and no serious political organisation in the UK (except the Labour party) pretends that public expenditure cuts will be anything other than the main feature of the next government. But the OECD is - without doubt - diligent, objective and non-partisan. It is the Government's international 'think-tank' of choice, and its recommendations yesterday should dispel firmly any lingering idea that there are alternatives for the future of public spending. It should (although it wont, as Mandelson and Balls' Today appearances confirm) put the final nail in the notion that there is some sort of choice between 'investment' and 'cuts'. There ain't. There are real and important debates about what we cut, and how severely. Debates the political parties and we the public should be having now. If the Labour party or any other group don't want to participate, that is their loss.

The Organisation for Economic Cooperation and Development (OECD) gave its strongest line on the OECD_grey_logo UK's fiscal problems yesterday, urging the Government to return to "credible" spending plans.

In the context of Lord Mandelson's admission that the Government would not be holding a spending review before the election, the OECD's 'Economic Survey of the United Kingdom 2009' is something of a rebuke of the Government's "we will spend our way out of trouble" approach; (albeit an unintended criticism).

While the preamble limits itself to the observation that delivery "of the consolidation [plan to fix the public finances] will require specifying the “value for money” savings beyond 2011-12 in the upcoming Spending Review," the OECD later makes little effort to disguise the fact that the government's determination to
increase investment in public services despite the downturn is largely responsible for the country's budget problems. Action to cut public expenditure must be bolder and more specific, with  "explicit targeting of programmes for expenditure cuts and temporary
revenue-raising measures"
to reduce the high debt levels".

It also recommends bringing an end to the (fairly scandalous) practice of hiding PFI and pension liabilities "off balance sheet"; these, along with the debts of the nationalised banks, should be considered in the setting of public debts targets. New fiscal rules should also be introduced, to replace those suspended by the 2008 Pre-Budget Report. There might be a role, the OECD suggests, for an independent fiscal authority to assess
whether the government was sticking to its spending rules (BBC website). In other words, the OECD is recommending bringing in the IMF. This is what bankrupt countries do, what the UK was forced to do in the 1970's, what Latvia and Turkey have done in recent months.

Unemployment is predicted to rise to 10%. The OECD also last week revised down its short-term outlook for the UK
economy, to a contraction of -4.3% this year, worse than the
government's forecast of -3.5%. Gloomily, they suggest that even if the moves to stabilise the financial system work (which is not yet certain) growth could remain well below trend, as households and firms rebuild their balance sheets. On that financial reform, the OECD makes warm noises about the potential benefits of greater European engagement, and note a continuing "unhelpful conflict" between the Bank of England and the FSA. It argues that "it is difficult to reconcile the overall
macro-prudential objective within the structure of two independent
institutions,"
and suggests linking them more closely through a joint
board with the final authority to take action. The Government is due to publish its plans for financial regulation soon.

What, one might ask, does this OECD report tell us that we don't already know? Nothing really. The media and opposition parties are doing a solid job (for now) of exposing the Government's national recovery 'plans' for what they are - pie in the sky - and no serious political organisation in the UK (except the Labour party) pretends that public expenditure cuts will be anything other than the main feature of the next government. But the OECD is - without doubt - diligent, objective and non-partisan. It is the Government's international 'think-tank' of choice, and its recommendations yesterday should dispel firmly any lingering idea that there are alternatives for the future of public spending. It should (although it wont, as Mandelson and Balls' Today appearances confirm) put the final nail in the notion that there is some sort of choice between 'investment' and 'cuts'. There ain't. There are real and important debates about what we cut, and how severely. Debates the political parties and we the public should be having now. If the Labour party or any other group don't want to participate, that is their loss.

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