Monday, 17 May 2010

Halligan: will the History Boys show courage?

Like me, Liam Halligan is impatient for realism and resolve from our new coalition government:
the coalition agreement, while it makes clear the new government wants to cut borrowing earlier and more aggressively than Labour had proposed, says nothing of any real substance. Some £6bn will be taken from planned spending on "non-frontline" public services this year, as the Conservatives wanted. But some of this, the agreement says, "can be used to support jobs" – meaning it could be spent again, rather than being used to cut the deficit.
The Tories' pre-coalition plans, such as they are, imply a tightening of 4.7pc of GDP by 2015-16 according to the Institute for Fiscal Studies. But even if these proposals end up halving the UK's huge annual deficit over the next five years, the overall stock of national debt still doubles from around £750bn to £1,500bn, resulting in ever-rising sums of taxpayers' money being wasted on interest payments. Coupled with that, of course, there's more than £1,000bn of additional liabilities parked off-balance sheet, related to public sector pensions and the grotesque private finance initiative.
We don't need an emergency budget to tell us how desperate our situation is. As Halligan rightly notes, "spending reductions of £6bn amount to rounding errors". He reckons the public can handle the truth: "the British people are not fantasists – but that's how our politicians treat us". I don't have a huge amount of faith in the wisdom of the masses, but you don't need a degree in economics to see that we've been living beyond our means, and that this cannot continue (indeed, a degree in economics seems to be one of the best blindfolds to economic reality).
Those at the top of this "historic coalition" need to stop playing political parlour games and display the courage and determination to take tough, decisive action. The five-year agreement is hopefully a precursor to this. Much rests on the shoulders of the Business Secretary, Vince Cable, and Chief Secretary to the Treasury, David Laws – two of the Lib Dems now in the Cabinet. Both men of genuine integrity and intellect, I'm pleased they're in government. The reality is, though, that the party they represent is still spouting Keynesian tosh.

During the election campaign, Brown used one line more than any other. "We need to maintain government support, or we will threaten the recovery," our then Prime Minister endlessly repeated. Yet "keeping the money in", as the Labour campaign crib sheet instructed, simply amounts to taking on even more state debt – at a time when extra borrowing could tip the UK's finances over the edge, sparking a sovereign default.

Such an outcome is far from impossible. It's where we're heading unless we take radical steps. The result would be spiralling interest rates and a fully-blown economic collapse – an outcome involving not only higher economy-wide borrowing costs for a decade and huge loss of national prestige, but also a great deal of human misery and dangers of serious social unrest.
As terrible as it sounds, sovereign default might be a better option than the alternatives (though if we're going that route, we should do it immediately). Attempts to inflate away the debt through renewed money-printing would be even more disastrous. Increases in overt taxation would be more honest, but equally dangerous and immoral.

Instead, if David Cameron is serious about revitalising the private sector, we need an immediate reduction in overall taxation, coupled with an immediate and dramatic reduction in public spending. Simply scaling back to the 'austerity' of 2002 would save hundreds of billions of pounds, and even accounting for increases in welfare costs, it would be enough to take us from deficit to surplus, allowing us to finally begin repaying the debt.

Accounting for inflation (the ultimate stealth tax), we still see hundreds of billions of pounds worth of potential savings, simply by rolling back the clock:

This should be a no-brainer, but the cuts will require courage, and Halligan fears that this may be lacking:
For all the back-slapping and "chemistry" between our two new leaders, neither have any professional experience beyond politics. A few years in public relations is the sum total of their time outside the world of soft-budget constraints. That's why, despite my support and high hopes for this coalition, I fear this Con-Lib alliance won't break free from habits of old. I sincerely hope that I'm proved wrong.

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