Public finances – just how much of a mess are we in?

As Marina Hyde notes, what should have been the main story of the day, the fact that the public finances are in the crap and the politicians don’t want to talk about it, has been blown away by Gordon Brown’s silly gaffe. But long after we have all forgotten about ‘Bigotgate’ (Bigotgate? WTF?) we will be feeling the pain of the cuts that no-one dared to mention.

While many voters still seem to be in cloud cuckoo land about the level of spending cuts needed, the dire state of the public finances will come as no surprise to those of us who have been paying attention. Understandably, though, reading through IFS reports and statistics is not everyone’s ideal way to spend an evening. If, like me, your preferred learning style falls in the bottom and left-hand boxes on Kolb’s model, something more interactive might help to make the mess we are in just that bit more real for you.

Have a go at the DIY spending review created by the Institute for Fiscal Studies. It’s easy to use – even I got the hang of it after a few goes.

The default setting assumes a real-terms freeze in the amount of public spending. If you simply raise public spending by inflation, the rising cost of welfare, public sector pensions and debt interest means that you would have to cut all other spending by 8.6% over the next 3 years.

Doesn’t sound too bad when you say it fast does it?

Remember, though, that the Tories and Labour have both said they would protect frontline health, education and foreign aid, so now move the three boxes ‘UK NHS’, ‘UK Schools’ and  ‘Official Development Assistance’ to zero, which would give you an inflation-linked rise. Now you have to cut everything else by 16.7%.

But what do we mean by ‘protect’? Because of the increasing demands on the NHS, its funding has to rise each year just for it to stand still. An inflation-linked increase on its own would amount to a cut. Even the Conservatives recognise this and have promised to increase spending on health. Labour have increased NHS spending each year by 6%. Let’s assume the Conservatives cut this back to 4%. Now go to the spreadsheet and put a 4 in the UK NHS box. The cuts to other departments are now at 24.6%.

Would any government, fighting an unpopular war in Afghanistan, dare to cut defence spending by 24.6%? I think not. Like health and education, demands on the defence budget are increasing all the time. I would not like to be the minister who would have to justify anything less than a real-terms freeze in defence spending. So, go to the spreadsheet and change the Defence figure to a zero.

Wow! Now we are cutting everything else by 30.1%.

In truth, we’ll probably have to bung the schools a real-terms increase too. Labour has been increasing their budgets by 4.1% per year and they still complain of under-funding. Let’s be less generous and give them 2%.

Oh, and remember we have actually made a pledge on foreign aid which all parties say they will honour and which will need a 7.9% increase. If you enter that you should now be left with a 33.5% cut in all other departments.

Even with these fairly modest spending plans, then, the money for transport, the justice system, social care, flood defences and a whole range of other services would be a third less in three years time than it is now.

And that’s before you have started cutting the deficit. Even with some increased tax revenues coming in as the economy starts to grow, you still need around £70bn to halve the deficit. Unless you slash and burn things further, you will have no choice but to raise taxes, not to fund services but just to reduce the level of borrowing.

You may disagree with my assumptions. If so, add in some of your own. What I guarantee you won’t be able to do is protect any of the high-profile services without decimating all the others. If, by some miracle, you find a way to do this, please let me know.

No, on second thoughts, write to whoever is in Number 11 after next week and ask him for a job.

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2 Responses to Public finances – just how much of a mess are we in?

  1. MarkyMark says:

    After the election, assuming that there is a change of govt, there is going to have to be a “OMG we’ve seen the books and things are much worse than even we had imagined in our worst nightmare and we may have to cut more than we thought” moment.

    It will be disingenuous and the public will no doubt feel betrayed when the cutters are taken to the ring-fence. But truth tellers don’t get votes.

    In addition to the fiscal problems there is also a more fundamental problem with the underlying structure of the UK economy.

    Early on in the crisis there was a lot of talk about the ‘financial economy’ versus the ‘real economy’. The problem for the UK is that financial services to a huge extent IS what passes for the real economy Furthermore the financial crisis exposed that much of the financial activity didn’t have any real productive value, it was a mirage, and in many cases has negative value in terms of the accumulation of hidden risks and liabilities which will have to be born by society at large.

    BUT since all this has been exposed as both unproductive and a sham, the only plan for the UK that I can see has been for a complete and utter determination to reconstruct/re-float an economy based upon City financial activity.

    Nothing has been learned. How can the outcome be anything other than another crash? I can’t. But next time the UK won’t have the financial resources left to deal with it. The resources have been squandered by society on propping up housing and maintaining the phony financial economy.

    If someone can convince me that the 1 quadrillion in derivatives now in existence have created genuine economic wealth and haven’t just been a sham which imperils the whole global and economic and financial system in order that a few bankers can have second homes in the West Country or the Hamptons I will re-consider my thoughts.

  2. Marek says:

    In response to MarkyMark:

    A few weeks ago, I met up with a group of friends I hadn’t seen since school. They were amongst the brightest, and I was intrigued as to what jobs they all had. Out of a group of ten, eight had jobs in financial services. I thought maybe a couple would but not eighty per cent! I know people talk about The City acting as an internal brain drain but I was staggered to see this reflected so starkly amongst my peers.

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