State of the nation


Remember the days, just a decade ago, when the UK was reckoned to be the world's 4th most competitive economy? Well, the World Economic Forum (or 'Davos' as it's known, from its annual conference in the Swiss resort) had downgraded it yet again, from 12th last year to 13th now. They cite the UK's enormous and chronic public-sector debts as just one of the many causes for Britain's gloomy report card.

As they might. International economists figure that Britain is running a 'structural' deficit of around £100 billion. That's nothing to do with the crunch, and the bank bailouts, and the recession – it's the amount by which the government is spending beyond its means, year upon year upon year. And £100 bn is a big wedge of moolah. It's nearly 7% of the nation's income. You couldn't run your household by borrowing every year – you would soon run out of dough, and you would be eating bread, not spending it. And you can't run a country like that either.

So how to get back on an even keel? Britain could simply renege on its debts: but that's hardly a way to get investors and customers to trust you. It could print money and pay everyone back in worthless, inflated currency: but that creates just as many enemies, and messes up your economy to boot. We could raise taxes: but that would stifle any recovery. Or we could cut public spending: which would be uncomfortable for politicians.

If you figure that an extra penny on income tax might raise £5 billion, you see how deep the hole is. Taxes are already high (as Davos complains), and raising them enough to fill the borrowing gap is just impossible. No, the brute fact is that, just as a household in debt has to cut back on its spending, a government in debt has to cut back on its public expenditure – which has ballooned so much that it absorbs nearly half of everything we earn.

Already, Chancellor Alistair Darling has started to mutter that there are 'hard choices' ahead. Well, the time for those hard choices is now. That is why the Confederation of British Industry will publish its own proposals to slash public spending next week. Let us hope it will bolster the Chancellor's resolve. And let's hope that the Conservatives' finance team gets more realistic on this question too. Otherwise, we will emerge from a General Election with all kinds of spending promises, and no plans worked out for reducing the costs of the public sector in ways that are as painless as they can be.