The horrific public borrowing forecast for this year of £175 billion – and the consequential £220 billion of projected gilts issuance – are certainly concentrating minds, especially those of credit rating agencies. The reality is that, irrespective of whichever party wins the next General Election, major public expenditure cuts will be obligatory; various percentages are currently being bandied about.
The key figure is the projected £671 billion of Total Managed Expenditure (TME) for 2009/10 - prior to interest payments. Future public finance policies should be based on implementing real cuts to that number. This £671 billion total is the sum of two key elements – Departmental Expenditure Limits (DEL) of £387 billion and Annually Managed Expenditure (AME) of £284 billion. Hence, any credible public expenditure cost-cutting strategy has to address how these two components can be sensibly reduced.
Imposing a top-down figure of projected cuts, say 2% in real terms per year for the next five years, would make sizeable inroads into public borrowing levels. In applying this top-down approach, it is clear that few exceptions should be permitted; otherwise, the cuts have to be higher elsewhere. Obvious targets for above-average cuts are parts of the massive social security budget - projected to cost £165 billion in 2009/10 - and local government expenditure, where efficiency levels are low and financial discipline is weak.
Given the grave state of the UK’s public finances, capital expenditure budgets will also need to be addressed, especially at the MOD, where cost over-runs - inevitably - continue. But experience shows that cutting public expenditure needs real political drive and determination. Since 1990, TME has risen from £360 billion to £583 billion in 2007/08 (based on constant 2007/08 prices). After all, even during the fierce assault on public expenditure during the 11-year Thatcher era, TME actually rose by just over 10%.