What the PBR should have said


I’ve written before about how dramatic the deterioration of Britain’s public finances has been over the last ten years, but it is worth underlining again in the wake of yesterday’s Pre-Budget Report. According to OECD figures:

  • In 2000, we had the 7th lowest public spending among the 30 OECD countries at 36.6 percent of GDP. In 2010, we will have the 6th highest at 54.1 percent of GDP.
  • In 2000, we were the 16th most indebted country in the OECD. In 2010, we will be the 8th most indebted country.
  • In 2000, we had the 7th lowest deficit in the OECD (in fact, we had a surplus). Next year, the UK will have a 14 percent deficit (10.4 percent of which is structural. That’s the most unbalanced budget of any OECD country.

What Alistair Darling should have done in the PBR was unveil a 5-year fiscal plan to return to 2000 levels of spending, adjusted for inflation and population growth. That would mean cutting spending from £661bn to £457bn, a reduction of some £204.4bn, or almost 30 percent. That would eliminate the £178bn budget deficit with enough left over for some pro-growth tax cuts.

Impossible, people say. But is it really? If management consultants can go into profitable, private-sector organizations and cut operating expenses by 20 percent – I’m told that’s the ‘magic number’ – then surely 30 percent cuts in the government sector should be more than feasible. After all, even factoring in inflation and population growth, public spending has risen by 45 percent in ten years, without corresponding rises in output.

Ultimately the problem is not an economic but a political one. With so many people on the government payroll – whether as direct employees, or as people who get more in benefits than they pay in tax – the client state has become enormous. That will be Gordon Brown’s most lasting legacy, and the next government’s biggest headache.