During the halcyon days of late August, October 20th seems some months distant. But Public Expenditure (PE) Day, when the Comprehensive Spending Review outcome is announced, will have momentous consequences for the economy.
Indeed, PE Day on 20th October may well be compared with two other infamous days in UK financial history – 13th October 2008, when the £37 billion bank bail-out was announced as Royal Bank of Scotland (RBS), unbelievably, came close to total collapse; and Black Wednesday on 16th September 1993 when the UK was humiliatingly ejected from the Exchange Rate Mechanism (ERM).
Yet, there seems to be little general understanding about the forthcoming budgetary cuts, which will be wide-ranging, controversial – and probably vicious.
Encouragingly, since the last Budget, gilt yields have fallen – both bringing down borrowing costs and reassuring foreign lenders. When the Coalition was established, the benchmark 10-year gilt yield was 3.9%; it is now just over 3%.
Although widespread spending cuts are inevitable, their impact is less clear. As outlined in the recent ASI publication, The Party is Over, most of the savings should be demanded from the big five spending departments.
Currently, social security cuts are being widely debated. A shrinkage policy, as outlined in last week’s blog, is the best option.
Although the Coalition has ring-fenced the NHS from cuts, much-needed administrative savings are already underway.
In terms of education, capital expenditure savings have recently been confirmed – and generated controversy following the shambolic nature of their announcement.
Proposed defence cuts are generating savage service in-fighting: it seems probable that the RAF will suffer badly. New aircraft orders will be cancelled and bases closed: the Navy will also have to cut back sharply.
Local Authorities, too, are under real pressure to cut back on their many excesses.
But will the Coalition survive the political fall-out from PE Day?