Feb 2010 04

But Not Yet13

Hmm… on second thoughts…
Everybody now agrees that public spending has to be cut significantly. But not everyone agrees on when. And despite what we may sometimes suggest on BOM, not everyone who says we can put it off is an out-and-out scoundrel.

For example, the FT's respected commentator Martin Wolf has repeatedly argued the case for delay. Yesterday he wrote:

"What needs to be done depends on the state of the various economies, with the case for continued stimulus strongest in Europe… That point was made by Dominique Strauss-Kahn, managing director of the International Monetary Fund. He also made another one: if we exit too late, we waste resources in excessive public deficits and debt; if we exit too soon, we risk the devastating shock to confidence of a “double dip”. Given this asymmetry, we should not withdraw stimulus early."

It's a perfectly reasonable argument, but also a dangerous one. Because that asymmetry Wolf highlights is more apparent than real. In reality, it is by no means clear that delaying the cuts keeps confidence intact. Confidence could suffer just as devastating a shock if we delay – as the Greeks are currently discovering. The Greeks are now being forced into a whole raft of emergency cuts precisely because previous delays and prevarication have undermined the confidence of financial markets.

Confidence is a delicate, little understood flower, and what nobody can predict with any certainty is how far we can go with our borrowing before it withers and dies.

As things stand, the OECD says our official debt will reach 94% of GDP by the end of next year (gross debt). Even setting aside the fact that our official debt excludes all those off-balance sheet Enron items like PFI, 94% is very scary. As we blogged here, the IMF recommends we get that percentage down to 60% as a maximum. Anything higher risks the government finding itself in a position where it no longer has the flexibility to increase its borrowing should a future need arise. Which is where Greece now finds itself.

Unfortunately, far from getting our debt ratio down, our rampant public borrowing is currently adding to it at the rate of 13 percentage points pa.

And as we've blogged before (eg here), that borrowing is now feeding back into an alarming escalation of debt interest costs. By next year debt interest costs will consume nearly 10% of government revenue, up from just over 5% as recently as 2008-09.

Even worse, that escalation is taking place even though the financial markets have so far remained remarkably patient in terms of the interest rate they charge HMG (ie the yield on gilts). What will happen if the markets lose their patience and push those rates up?

As it happens, the IFS has just published some rather scary estimates of how that might play out (HTP Andrew L). They report a statistical analysis with quantified estimates of how government debt and structural fiscal deficits have affected gilt yields historically. They conclude that if our structural deficit is left at current levels – ie there are no substantive cuts – then gilt yields could "easily reach double digits" by end-2011.

Now, those yields are currently around 4% (10 year gilts), so that is a huge increase. Translating it into debt interest costs, it would mean that our prospective annual borrowing of £150-£200bn would generate additional annual servicing costs of £15-£20bn pa, rather than the £6-£8bn currently assumed. And of course, such costs are cumulative – three years of borrowing at 10% would add £50-£60bn pa to debt servicing costs. Or, £2,000 pa of additional taxes for the average household every single year.

 
Which is why we need to push on with those spending cuts right away. With our public sector debt rapidly escalating, we can't afford the risk of saying we'll cut but not yet. We need to prove to the markets that we're serious. We need to show we're ready to accept some short-term pain, and that we don't need a Greek-style crisis to concentrate our minds.

As the man in the picture meant to say, 'Grant me chastity and continence, and do it now!'

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  • Bedd Gelert

    It is a fair point you make, but having allowed one’s speed to creep up to 80 mph in the town centre, the answer is not to slam on the anchors so fast that one enters into a skid, loses control and wipes out a pedestrian crossing full of children and old people…
    Of course, there is a debate to be had about whether Mandelson’s ‘just gently take the foot off the throttle’ and continue to do 60ish in a 30 zone is the better solution.
    But somewhere there is a sensible level of spending to be achieved without completely wiping out the possibility of growth in the economy for the next 20 yrs…
    But this is a problem that has built up over 12 years – trying to sort it out in 12 months might be a real disaster – as the old saying goes, the best cure would have been prevention..

  • Steve Robson

    how quickly everyone forgets just how terrible things were under the Tories!
    THEN
    massive waiting lists in hospitals
    schools with holes in falling apart
    deteriorating public stock and spaces
    long stay hospitals for MH/LD
    Homophobic and racist legislation
    £1 per hour pay rates
    homeless everywhere
    NOW
    minimum wage
    new hospitals
    new schools
    minimal waiting lists
    better exam results
    Britain at the centre of Europe
    Northern Ireland peace
    Care in the Community delivered
    It is far from perfect and the challenges of an ageing population, waste disposal, a dangerous world and climate change are huge (and expensive), but “prevention” and therefore continuous Toryism – your having a laugh!

  • matthew burnham

    The laughs on you Steve, if you believe that list of nonsense you have just come out with.

  • gigbod

    Great counter-argument Matt.
    A few more to add – inflation, high interest rates, sleaze, no human rights act…

  • Steve Robson

    I guess the trouble is my NOW is as I see it walking down the street, rather than in the pages of the Daily Mail/Express or through the warped perception of the TPA. Good point about inflation and interest rates gigbod. I too had this recollection that interest rates went up to about 16% higher under the Tories than now, but I’m probably imagining it and Matthew will be able to put us right and tell us that, like crime and hospital waiting lists, interest rates and inflation are actually much higher now!

  • gigbod

    Also, I seem to remember that as well as fiddling expenses, lots of MPs were taking cash off large corporations to influence decisions in what is supposed to be a democracy.

  • matthew burnham

    Illegal land war killing 1 million innocent people.
    Filthy disease ridden hospitals (seen them myself, I had two kids born in Basildon Hospital, thats the one in the news)
    Massive cover up of true unemployment stats leading to surging benefits culture.
    Impending national bankruptcy, staved off by ‘printing our own money’
    Intrusive and unnecessary pathetic laws.
    Timewasting, self serving nanny state.
    Totalitarian surveillance society.
    Crisis of law and order due to jails overcrowding.
    Human rights act misused to stifle common sense law and order.
    Corporatisation of schools and councils.
    And on your points, do you not think we’ve had a bit of ‘sleaze’ under the current lot – Jacqui Smith, Mendelson, Blunkett? And do you not think interest rates wouldn’t be a bit higher if we hadnt taken to printing our own money, like Hitlers plan to DESTABILISE our economy in the second world war. And do you not think this government is in the pocket of large corporations, just like all the others? Nowadays they put their pals in the house of lords. And do you not think its easy to build new schools and hospitals if moneys no object? And if you think Britain’s safer nowadays, despite fairly substantial visual and documentary evidence otherwise, just because the government says so in its ‘statistics’ then you probably believed George Bushes casualty stats for the first years of the Iraq war, despite the fact that they didn’t include people killed in ‘explosions’.
    Whatever guys, this lot are going soon, they represent something very far from democracy.
    And by the way I am not a Tory and I don’t read the Daily Express or the Mail. I despise all politicians. But I would vote for Atilla the Hun to get this lot out.

  • gigbod

    Quite agree with pretty much everything in your post Matt.
    There was one party against everything you mention – the Lib Dems.
    We used to have a good centrist liberal / libertarian tradition in this country, which wouldn’t have gone to war or imposed ID cards on an electorate clearly opposed to them.
    Now we have Lembit Opik. Oh well, hold your nose and vote lib dem or green party?

  • Terence Griffin

    Steven Robson’s arguments are typical of the self righteous humbug of the left. Things were not ideal under Margaret Thatcher but what a lot of ground there was to make up! It is always going to be hard after a period of Labour Government because they govern on the basis of a warped Keynesian vision where the supply of funds (the taxpayer) is infinite.
    Economic planning is as old as the bible but requires a surplus to begin with. In this day and age deficit financing is acceptable but there is always going to be a payback. The Government is working on the basis that this will be after the next election when, if they win, they will have another 5 years to spin their way out of it, or if they lose the Tories will get the blame.
    A win win scenario for Labour.

  • Steve Robson

    Actually Terence, its the other way round; Labour has to come to power and put right the damage done by the Tories; public services were in a terrible state when they left office in 1997 and Labour has had to invest to put things right.
    That being said, I do agree that some of the spending is misdirected, though as a percentage a lot less than most of you people think. I also don’t agree with Iraq, though not so sure as Matthew that its illegal and I’m pissed off about the fact that they haven’t addressed the benefits culture that Thatch created. They’ve also been too timid and should have sought to destroy the Right, rather than letting it fester on sites such as this. So I’ll be voting Green, not Labour anyway!
    And if Matthew despises ALL politicians, he should stand. If we had NO politicians, we’d have NO democracy at all and we really would be in the state that he appears to think we are anyway!

  • Call me Dave

    All unhappy socialists should vote green. Great idea.

  • matthew burnham

    Steve. I’m not quite as daft as you think I am. I do think theres a fairly substantial argument for dismantling the current polarised political system, which seems to consist of two large groups of people, many of whom went to the same universties and read the same books, picking a side, then spending vast amounts of money trying to persuade the public that the other group is ‘bad’. Meanwhile as anyone can see, the free market and the power of the supercorporation became our true ruler many moons ago. There are many things not essentially ‘left’ wing about this government. The illegal land war being one, the corporatisation of many elements of the public services being another (surely a truly left wing government would have abandoned Thatchers work not continued it). In short, ‘left’ and ‘right’ wing governments are largely a myth IMO. They simply collect taxes and attempt to distrubute them in such a way as to guarantee continued power. I think the time will come where we simply elect a panel of say 10 or 20 elite intellectuals, for fixed periods, without the pomp, corruption, spin,
    farce and false politics of the current system.

  • gigbod

    Yay – back to Aristotle’s idea, benevolent dictatorship of clever chaps and chappesses. (Or Socrates’ idea – can’t be bothered looking it up sorry.)
    Trouble is human knowledge is so limited, even in clever chaps, they would end up screwing up and we wouldn’t be able to get rid of them.
    There ought to be a sort of survival of the fittest in politics – gradually getting rid of the worst ideas because they keep getting voted down, but it’s awfully slow if it even happens at all.