Tuesday, 24 August 2010

Cuts? What cuts?

John Redwood writes:
According to this year’s budget plans, public current spending will rise from £600.6 billion in 2009-10, the last Labour year, to £692.7 billion in 2014-15, the last planned year of the Coalition government in this Parliament. That’s a rise of £92.7 billion, or more than 15%: a rise of £1500 for every man, woman and child in the UK.
Ah, but what about inflation? How much of it would we need each year for £692.7 billion to represent a real-terms cut? (692.7 / 600.6) ** (1 / 5) = 1.02894455, so the answer is anything higher than about 2.9%

2009-10: 600.6
2010-11: 600.6*(1.029) = 618.0174
2011-12: 618.0174*(1.029) = 635.9399046
2012-13: 635.9399046*(1.029) = 654.3821618
2013-14: 654.3821618*(1.029) = 673.3592445
2014-15: 673.3592445*(1.029) = 692.8866626

But much as we'd like to see real terms cuts in public spending, we shouldn't hope for higher inflation! We're screwed either way. Inflation is a stealth tax — legalised counterfeiting that redistributes wealth to the recipients of new money, from everyone else.

If our GDP grows at more than 2.9% per year, public spending will shrink as a percentage of GDP, but GDP is a terrible measure of wealth, and in any case the reduction will be modest. In 2014, the public sector will still account for far more than the 15-25% of GDP that the Rahn Curve suggests is optimal. Our national debt will have risen, and our interest payments with it.

We cannot go on like this.

If the Coalition were truly serious about balancing the books, they'd immediately roll public spending back to 2002 levels. The sky wouldn't fall.

Unfortunately, as I've noted previously, and as Kevin Dowd explained yesterday in an article for the Cobden Centre, the official debt figures significantly underestimate the seriousness of our situation:
The official debt is merely the tip of a very large hidden iceberg.

The Government’s true debt is the present value of all the commitments it has entered into, on the expectation that these commitments will be paid for by future taxpayers. Some prominent examples are the commitments implied by the public sector pension system, the state pension system, the health system and PFI. The costs of these commitments are staggering.
One recent estimate suggested that a UK citizen born in 2011 will inherit, on birth, a debt of perhaps £200,000, and it could easily be much more.

It is simply inconceivable that debts on this scale will be paid off in full.

Nor should they. These were not debts that youngsters freely took on, but obligations incurred on their behalf in many cases before they were even born.

The uncomfortable moral question then naturally arises: at what point does the debt become so large that our future children will be born into a new form of slavery, entering the world shackled by the debts of their forbears?

This highlights the underlying moral as well as fiscal bankruptcy of the system. For years, politicians yielded to the temptation to increase spending commitments and put off the costs of those decisions into the future, when it would be someone else’s problem. The political system itself encouraged them to do so – handing out goodies is so much easier to sell politically than handing out pain. Even the voters themselves were complicit, because they voted in governments committed to ‘spend now, [someone else] pay later’ policies, instead of penalising governments for long-term fiscal irresponsibility. Most of those who will pay the burden did not yet have the vote, so they didn’t count. No-one took responsibility for the long-term.

In so doing, our political system created a huge intergenerational Ponzi scheme, passing the buck from one generation to the next, until the whole rotten system inevitably collapses under its accumulated weight.
Repudiation is looking ever more attractive. With our current band of politicians in power, stealth-default through hyperinflation seems more likely. That route will ensure maximum suffering for the masses.

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