Lie number 1. The Labour Party is claiming that these spending cuts are about "taking money out of the economy" and will precipitate a "return to recession". There is no evidence that running a deficit that is as high as 12% of GDP (higher than Greece) bolsters the economy. In fact quite the opposite. After all, if running huge deficits saves the economy surely it should be steaming along, when in fact in the last quarter it grew by 0.2%.
Allister Heath in City AM proclaims the arguments in favour of continued the high levels of deficit spending are "intellectually bankrupt, pseudo-Keynesian" as the bloated state crowds out the private sector. Why? Because when the state borrows on such a scale, it does so by issuing sovereign debt. It has to do so at market interest rates to attract investors, so it attracts investment from the private sector, in everything from manufacturing to services to banks seeking deposits to boost their own leverage. One of the leading lights of leftwing journalism in the UK - Polly Toynbee of the Guardian - shows up her own economic illiteracy in saying "If Europe causes a second dip, cutting is a bad decision; if Treasury receipts strengthen, then such deep cuts so fast may not be needed." So it is NEVER a good idea to cut government spending according to socialist Polly.
So Labour is dead wrong, and largely to blame for the current set of affairs (most of the deficit is not about bailing out the banks, but about the collapse of tax receipts to prop up the bloated state built up by Blair and Brown, and overextended by Brown in recent years). Yet before the election it didn't completely shy away from cutting spending.
Lie Number 2. Labour wouldn't have cut spending. You see Labour did pledge to halve the deficit in five years, which would have meant a sustainable reduction in spending of at least £20 billion per annum. While Labour wouldn't cut spending in 2010, it would have been under enormous pressure to impose significant cuts in 2011. However, its new Great Leader will no doubt simply oppose cuts regardless of the 2010 Manifesto.
Lie Number 3. The savings are all going to cut the deficit. No. £0.5 billion of the savings are actually going to be spent elsewhere and used to start some tax cuts. The latter will be a miniscule boost to the economy, but in essence it sends the message that cutting spending means having money to spend elsewhere. It doesn't while you still have a budget deficit, especially on this scale.
Lie Number 4. The cut in spending is substantial. No. The saving of the total UK budget is less than 1%. Yes that is all that is being saved. It tells you something that total UK government sector spending is 100x this. That comes to the real issue. The budget deficit this year is £163 billion. Less than £6 billion off of that is 3%.
Shifty evasion number 5. There will be further cuts, but this was the hard part. No. Even an optimistic view about the economy, which given the crisis in the Eurozone (which is easily the UK's biggest trading partner) is unlikely, would likely generate sufficient tax revenue to cut the deficit by between a third and a half over time (time during which debt will have increased and the debt servicing costs as well). So there needs to be, at the very least, cuts 12x those implemented yesterday.
Shifty evasion number 6. Future cuts can be made through "efficiency savings" and "trimming budgets". No. Let's assume there needs to be cuts of around £105 billion in spending. You could not do that without hitting some combination of welfare, education, health, defence, or cutting public sector salaries. In other words, significantly limiting the welfare state. The "pain" has just begun, and the dirty little secret is that the UK welfare state as it stands is unaffordable and unsustainable. At some point hard decisions are going to have to be made such as:
- Will health and foreign aid both remaining untouchable areas, both with real increases in spending?
- Should public sector salaries be cut by up to 20% on average?
- Will tertiary sector funding increases have to come entirely from fees?
- Will pensions and welfare benefits be frozen or cut?
- Will middle class welfare, such as winter fuel allowances for the elderly be severely curtailed?
- Will government housing expenditure be halted?
The Conservatives probably know that, and also know that having the Liberal Democrats part of the government that does some of these will help spread the political blame.
However, the public still remains ignorant of the scale of the problem. Which brings me to:
Incompetent explanation of the need for spending cuts. George Osborne as Chancellor of the Exchequer has done a shocking job of selling the need for cuts. He hasn't explained that interest rates could rise if cuts aren't made, he hasn't explained that a bloated state does not allow the private sector to grow, he doesn't convincingly make my first point above, that continued deficit spending is NOT about keeping the economy going - it takes money from the private sector to make the state take it from taxpayers in the future.
What the 1% cut in public spending means is simply a sign of willingness to take steps to deal with Britain's fiscal catastrophe. It is seen as a first step, but sadly is being portrayed as "taking the tough decisions early".
The cuts announced are easy and obvious, although a minor point is that it is odd for government to cut spending on roads when it doesn't allow the private sector to enter the market (and already recover revenue 4x that which it spends on roads from road users).
On top of that it is nice to see the UK doesn't have privatisation -phobia like New Zealand does.
The Royal Mail is to be part-privatised (49%) to raise money and to get private investment into the firm. Far more interesting is that the government is considering a serious proposal to lease the entire motorway network to the private sector.