Why it is right to cut spending now
by Dr. Ros Altmann
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To cut or not to cut – that is not the question. The question is how soon to cut and whether reducing spending by £6billion now will be worse, or better, for medium-term growth.
Those who argue for delaying cuts this year until economic recovery is ‘established’ are offering false hope. They are suggesting short-term palliatives, while failing to address the medium term dangers that loom ever larger, the longer we wait. Promising to start a diet tomorrow does not help you become slimmer. The choice is not between maintaining spending now and avoiding a double dip recession. It is between failing to take action quickly and risking a much worse downturn later on.
That cuts must come is beyond doubt, because we have been living beyond our means, as a country, for several years. Let’s be clear, this is not just about reducing the annual budget deficit either. Reducing the deficit simply slows the rate of growth of the debt, but it will still be increasing.
The UK’s fiscal position is unsustainable and, without radical spending cuts, we could indeed be heading for a Greek-style denouement. Those who deny this, cite the UK’s lower 2009 reported levels of public debt (72% of GDP versus 119% for Greece). But this ignores hidden UK debts such as public sector pension liabilities. Yes, it is true that a 25% currency depreciation has helped growth, but sterling weakness is already unwinding and indeed its stimulatory effects are benefitting growth this year, which argues for cuts now, rather than later! The fact that interest rates are low is also insufficient evidence of the markets’ assessment of UK debt levels. Firstly, the Bank of England’s Quantitative Easing programme has artificially distorted gilt yields and secondly, the markets have so far given the UK Government the benefit of the doubt, but any lack of resolve to tackle the deficit quickly could well frighten investors and undermine vital confidence.
The bottom line is that we cannot afford the public spending we have become used to. Government wanted us to believe that the state could keep growing to an ever larger proportion of our economy without impairing growth. This is politically convenient, but dangerously misguided. Especially in an ageing economy, we have merely borrowed growth from future years, but we cannot have that growth both today and tomorrow.
Wittingly, or unwittingly, policymakers have ignored demographic realities. From 2011, waves of baby-boomers start reaching age 65. They were huge contributors to growth in past decades. With falling birth rates, they had more spending power and increased female labour force participation added significantly to both output and spending. This demographic boost has been squandered, however, as Government failed to ensure the baby boomers set aside sufficient savings to sustain themselves in retirement. Indeed, policy encouraged borrowing and discouraged saving, just at the time when we needed the opposite.
Choosing to prioritise near-term economic strength and ignore the medium-term consequences, policymakers have bribed the electorate with future taxpayers’ resources. The lack of appreciation of forthcoming ‘demographic drag’ is resulting in misguided calls to avoid spending cuts, in the hope that growth will magically appear and become self-sustaining. This is misguided. We cannot return to the pre-credit crunch output levels, because they resulted from unsustainably high public and private sector borrowing which has to be repaid. The best we can hope for is moderate growth while the economy eliminates public sector waste, pays down debt and diverts resources towards private wealth creation.
The more we delay the cutbacks, the bigger the debts that will need to be cut. And what happens if the economy suffers a setback next year? Will spending cuts have to be postponed still further?
Which public expenditure is essential, and which is ‘nice to have but we can do without it if we cannot afford it’? Those are the choices that the Government is rightly making now.
The sooner the Government stops committing money we do not have to propping up unsustainable spending, the better. Cutting public sector waste now, is an essential precursor to sustainable future growth. It is simply not credible to suggest that saving £6billion, out of a £150billion plus deficit will undermine our economy. Not cutting now that the worst of the crisis is past, is much more of a risk to our economic future.