The financial markets welcomed the recent Budget and its determination to cut the massive national debt. Evidence of this support has been provided by the 10-year gilt yield, which is now below 3% – a sign of confidence in the government’s future. Tomorrow's Comprehensive Spending Review (CSR) will be the next critical step in showing the government's resolve in making cuts to expenditure. Hopefully, the government is ‘not for turning’ on this most crucial of priorities.
With public appreciation of the need for spending cuts seemingly skin-deep, one statistic from the Chancellor’s conference speech underlined the need to reduce public expenditure with a vengeance: the UK is paying £120 million per day to service the interest on its vast public debt and this figure is certain to rise in coming years as the national debt increases. Just think about it - £120 million a day is £5 million an hour. On a full-year basis, it means that every family in the UK is spending roughly £2,500 per year to finance the over-spending of the past, purely on interest repayment, while the overall debt grows unchecked.
During and after World War II, debt levels as high as our current ones were inevitable as the only priority had been to defeat Nazi Germany. But in an age dominated by a consumer-driven society, similarly excessive debt levels are unforgiveable. Cutting back public expenditure so sharply will be a herculean task. Even during the Thatcher era, public expenditure rose on average by around 1% in real terms per year over the 11-year period.
From October 20th, some spending departments will suffer greatly. Others, like the NHS, have secured apparent exemption, presumably for political reasons. But public expenditure must be continue to be cut over the course of the government, even if economic growth proves to be sluggish. Failure to do so will only continue the roller-coaster of excessive borrowing driving up debt levels – and, in time, financing costs. Greece provides a textbook case.
The CSR tomorrow may be a start, but cuts will have to continue. This is no time for a wobble.