No alternative to cutting spending


It is a bit frustrating to keep being asked about whether the ‘cuts’ are a good idea, and whether we should be looking at alternatives. Frankly, that debate is a good couple of years out of date. Given the state of the public finances, there really is no alternative.

It is worth restating the bald facts. Our budget deficit this year is just under £150bn. That means that the government is borrowing almost £20m per hour, every hour, throughout the year, just to finance its ongoing expenses. And we’re already spending £120m per day paying the interest on debt we’ve already built up. Without spending cuts, Britain would be facing the same kind of fiscal meltdown that has already hit Greece, Ireland, and Portugal.

We also need to remember that the coalition’s spending plans are not that radical. Adjusting for inflation, they are only set to reduce total spending by a few percent over the next five years. To put it another way, we’re going back to 2008 levels of spending. It’s hardly the public service apocalypse some people suggest.

And what of the so-called alternatives? Well, Some people say that rather than cutting public spending, we should just have higher taxes – especially on the rich. But high taxes constrain growth, they discourage wealth creation, they force profitable businesses overseas, and they deter investment. This is precisely what you don’t want after a recession, and also means that high taxes don’t bring in much (if any) extra revenue. Raising taxes now would be utterly counter-productive.

Then there are people who say that rather than cutting public spending, we should crack down on tax avoidance. But as Tim Worstall has shown, many of these tax avoidance claims are based on a misguided idea: that any multinational operating here should pay UK tax on any money they make, anywhere in the world. This is absurd – taxes should be paid in the jurisdiction where the profits are made, plain and simple. Adopting the protestors’ preferred approach would decimate the economy, and cost countless jobs.

There are also those who argue that we’re in this mess because of the banks, so we should just punish them rather than cutting spending. Well, I opposed the bank bailouts too – propping up failure just isn’t what capitalism is about. But this has nothing to do with the budget deficit, and nothing to do with the urgent need to reduce public spending. The last government raised public spending by 60 percent in real terms, and borrowed huge sums of money even when the economy was booming. The public sector grew unsustainably large as a result, and now its excesses have to be reined in. Banker bashing does nothing whatsoever to deal with the actual problem.

Finally, there are some people saying we should increase public spending in order to boost the economy. But I’m amazed people still cling to this idea of ‘fiscal stimulus’. The evidence suggests that stimulus spending has no impact on growth in countries with open economies, floating exchange rates and high levels of accumulated debt. Countries like Britain, that is. And it’s hardly surprising, given that the whole concept is illogical – the government can’t inject a single penny into the economy without first taking it out. What it gives with one hand, it has to take away with the other. Or as Milton Friedman would put it, “there’s no such thing as a free lunch.”

So there you have it: we have to have spending cuts, and we have to have them now. There are no sensible alternatives. If anything, we should be going further and faster. But that’s a topic for another day.