The impact of the coalition’s plans on Britain’s debt

When considering the impact of the coalition’s spending plans it’s worth noting the impact they claim it will have on the Britain’s debt. There are 3 key figures to consider:

  • The total public debt. I.e. the total amount the government owes. According to the June budget, the official public sector net debt stood at 53.5% of GDP in 2009/2010 and was projected to rise to 74.4% of GDP by 2014/2015, had we stuck to the previous government’s plans. Under the coalition’s plans, the figure for 2014/2015 is just under 70% of GDP by 2014/2015, peaking at just 70.3% the previous year and falling to 67.4% by 2015/2016. In other words, even with the additional reductions in planned spending and increases in tax, the UK’s debt as a proportion of GDP will still grow for the next 4 years.
  • The budget deficit. This is the shortfall between total public spending and tax revenues for any given year. Again according to the June budget, the public sector net borrowing stood at 11% of GDP in 2009/2010, and was projected to fall to 4% of GDP in 5 years time under the previous government’s plans. Under the coalition’s plans, the deficit is projected fall to 1.1% of GDP by 2014/2015, and the “cyclically adjusted” deficit is project to be eliminated that year and go into surplus in 2015/2016.
  • The interest paid. This the minimum amount the government has to spend to service the debt (more needs to be spent to reduce it). This figure was projected to rise from £30.3 billion in 2009/2010 to £67 billion by 2014/2015 under the previous government’s plans. It is now project to rise to £63 billion in 2014/2015 and £66.5 billion in 2015/2016.

Thus the difference between the coalition’s plans and the previous government’s plans is that the former would see the deficit eliminated and the debt as a percentage of GDP starting to fall by 2015/2016, where both would still be increasing under the latter. And these figures are all dependent on economic growth projections being realistic. If growth is slower than expected, then eliminating the deficit within the current timescales will require even larger reductions in planned spending or bigger increases in taxation than we’ve seen thus far.

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On the size of the coalition’s spending cuts

The home page of the TUC‘s campaign against the coalition’s spending cuts describes the campaign as being “against the Government’s deep, rapid cuts in public spending” (emphasis added). A blog called “A Thousand Cuts”, dedicated to critiquing the coalition’s plans has “The slashing and burning of Britain’s public services” as it’s sub-title. The BBC claims the Institute of Fiscal Studies described the cuts as “longest, deepest, sustained period of cuts to public services spending at least since World War II”.

In other words, we’re being told by various sources that the cuts to public spending are going to be larger and more severe than we’ve seen in recent decades. But what are the numbers behind these claims?

The Adam Smith Institute (ASI) summarises the figures on total managed expenditure as follows:

Year TME (£ bn) Nominal change (%) Real change (%)
2010-11 696.8
2011-12 699.8 +0.43 -1.54
2012-13 711.0 +1.60 -0.39
2013-14 722.0 +1.55 -0.44
2014-15 737.5 +2.15 +0.14
2015-16 757.5 +2.71 +0.70

Meanwhile they summarise current spending (covering the vast bulk of “front line services”) as in the following table:

Year Current Ex. (£ bn) Nominal change (%) Real change (%)
2010-11 637.3
2011-12 651.1 +2.17 +0.16
2012-13 664.5 +2.06 +0.06
2013-14 678.6 +2.12 +0.12
2014-15 692.7 +2.08 +0.08
2015-16 711.4 +2.70 +0.69

From these tables we see that under both measures of spending, the budgets will increase in nominal terms every year, and current spending will increase overall in real terms. Note that these figures come from the budget documents themselves and assume inflation of 2%. The ASI conclude:

Now, OK, these are not exactly big rises – but nor are they swingeing cuts that will (a) have any significant effect on the economy or (b) on the public services-using population at large. What the coalition’s spending plans really amount to is a five-year, real terms freeze of current expenditure, combined with three years of significant falls in capital expenditure. The overall impact of that is a a very small, real terms drop in TME (roundabout 1.5%) between now and 2015-16.

I’m not so certain the cuts will be quite as small as that in real terms. Current official measures of inflation are significantly higher than 2%. According to the BBC, the Consumer Price Index was last measured at 3.1% whilst the Retail Price Index (which used to be the main official measure of inflation) was measured at 4.7%. At 3.1% inflation, the current expenditure of £637.3 billion would rise to £742.40 billion by 2015-16 in real terms. The projected £711.4 billion would thus represent a 4.18% cut in spending in real terms rather than a 0.69% increase. At 4.7%, the £637.3 billion would rise to £801.82 billion and the projected £711.4 billion would represent a more significant 11.27% cut.

All of these figures are a far cry from the picture of “deep, rapid” cuts or “the slashing and burning of Britain’s public services” offered by some. Of course, a freeze or small reduction in spending represents a major shift compared to the constant increases in spending under the previous government. Also, it may be that within individual departments there will be more severe cuts than this picture represents since e.g. health spending is being protected.

Nevertheless what we’re actually getting is something in between a freeze and a modest reduction in total spending in real terms.

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On the impact of public spending cuts

Via this comment on a post at Liberal Conspiracy, I came across this argument from Anthony Trew against cutting quangoes that equally applies to cutting public spending in general:

With every quango abolished there will be a number of their employees losing their jobs. With every person losing their jobs there is an inevitable impact on their families. With every family affected there will be a lessening of the spending power of that family. With every family affected spending less money, local businesses will suffer. With each local businesses suffering, economies in whole areas and regions will be affected. With every local business affected every national business that supplies them will be affected too. With every business suffering, their profits will inevitably fall. With the profits of every business falling, tax receipts will fall too.

Given the above, how the hell will we not end up with a double dip recession?

The problem with this argument is that it considers only one part of the picture. One could equally validly argue against increases in public spending (and by implication against the existing public spending we have) as follows:

With every increase in public spending there will be a number of people paying more in taxes(*). With every person paying more in taxes there is an inevitable impact on their families. With every family affected there will be a lessening of the spending power of that family. With every family affected spending less money, local businesses will suffer. With each local businesses suffering, economies in whole areas and regions will be affected. With every local business affected every national business that supplies them will be affected too. With every business suffering, their profits will inevitably fall. With the profits of every business falling, tax receipts will fall too.

Given the above, how the hell will we not end up with a double dip recession?

(*) The government could fund things via borrowing, but that is really just deferred taxation.

In both arguments, the loss of spending power of those affected is claimed to undermine the country’s economic performance. In reality, assessing the impact of spending cuts on the economy will be a matter of balancing the positive impact of the reduced need for taxation  against the negative effect of making public sector workers unemployed and reducing or eliminating the services those workers were providing. If the former is greater than the latter, then the cuts will be a boost to the economy overall. If the latter is greater than the former, the cuts will undermine the economy.

Now I haven’t shown here that the government’s cuts will be either harmful or beneficial to the economy, my point is that simply looking at the reduced spending power of those made redundant via the cuts involves focusing solely on the negative impacts of the cuts.

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