Thursday, 21 October 2010

Clougherty: Reflections on the spending review

Last night I caught the end of a BBC interview with Tom Clougherty, and was pleased to see him stressing that government doesn't have any wealth except that which it takes. Stimulus in one place means de-stimulus in another. The government can borrow, but this crowds out private sector borrowing.

This morning, Mr Clougherty wrote this article for the ASI:

First up, let’s give credit where credit is due. George Osborne stuck to his guns yesterday, and achieved with the Comprehensive Spending Review what he set out to achieve, outlining £81bn in savings that the government would make between now and 2015. If these savings are realized, the government will hit its spending targets and take a big step towards balancing the cyclically adjusted current budget by the end of the Parliament. It took political courage to do this in the face of widespread special interest opposition and a generally unfriendly media.

But we do need to keep things in perspective. As the chancellor admitted in his speech, we are only going back to 2008 levels of real terms spending – so this is hardly the fundamental re-imagining of the state that some of us were hoping for. Indeed, if you assume two percent a year inflation, total spending will only fall by a couple of percent between now and 2015 – despite admittedly severe cuts in some specific departments, and particularly in capital budgets.

The reason for this is largely down to three things: health, welfare, and debt interest payments. Debt interest payments are set to skyrocket over the next five years, rising by 35 to 40 percent in real terms, and will end up costing us more than the entire education department. Welfare spending is going to remain more or less the same over the next five years, while health spending will rise in real terms by 4 percent or so. Together these three things represent almost half of total public spending, so the lack of savings counterbalances cuts elsewhere.

Read more.

(hat tip to Guthrum at LPUK)

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