Carwyn Jones and Alex Salmond choose the easy path

The first ministers of Scotland, Wales and Northern Ireland have issued a joint statement attacking the UK government's spending plans. The following is the important part of their joint declaration:

"The proposals to cut public spending to such an extent run the risk of stalling any recovery.

Private sector demand remains fragile and access to finance continues to be constrained.

The current plans for fiscal consolidation could therefore have a significant and lasting negative impact on the economy, including people's jobs, which would undermine the very efforts to address the UK's fiscal position.

We believe that promoting economic growth is the best way to restore the health of our public finances and this must be our overriding priority."

Alex Salmond, Scotland's first minister, has been spearheading today's announcement and has taken every opportunity to lampoon the coalition's spending plans on TV and radio news programmes. I would remind him of two things:

• Firstly, according to the Holtham Report, whereas Wales is underfunded by the Treasury to the tune of £300m a year compared to an equivalent English Region, Scotland by the same calculations is currently overfunded by a whopping £4.2bn per year. This means that as we move into the belt tightening phase, Scotland starts from a better supported position than any other region in the UK.
• Secondly, if Alex Salmond thinks that the coalition's programme to reduce spending is too severe he has recourse to a very simple means of offsetting the effects of those the cuts in Scotland: he can use the tax-varying powers granted to the Scottish Parliament to increase income tax in Scotland by up to 3p in the pound in order to fund a reduced pace of cuts. Unfortunately Mr Salmond doesn't have the balls to unilaterally adjust income tax in Scotland as he knows the Scottish electorate wouldn't tolerate it -- therefore he's content to demand that the elected Westminster government (which is already overfunding Scotland by £4.2bn) should abandon their much telegraphed plans and instead raise taxes throughout the UK so as to protect the Scottish public services which Mr Salmond himself is too politically cowardly to take action to protect.

Of course unlike Scotland, the Welsh Assembly has no such tax varying powers and therefore Welsh first minster, Carwyn Jones, is able to make the same argument as Mr Salmond safe in the knowledge that he is not in anyway accountable to the people of Wales for the amount of tax they pay. However he is responsible for how efficiently that public money is spent -- and if WAG was a paragon of efficiency and cost-effectiveness I would have great sympathy with Carwyn's position. However we know that public money in Wales has not been well spent and the recent problems highlighted by the leaked McKinsey report into the running of the Welsh NHS are a case in point, as was the decision to maintain for ten years the £50K+ salaries of hundreds of NHS executives who were found to be surplus to requirements following the last Welsh NHS reorganisation. Therefore, although I fully support any calls for the Barnett Formula to be amended as per the Holtham recommendations, I would argue that the first task of the Welsh Assembly Government is to prove that it can manage public money more efficiently before taking the easy option of simply blaming the coalition government's spending plans.

On a related note, I have argued previously (here and here) that the Welsh Assembly should have tax varying powers in order to, amongst other reasons, make our Welsh politicians more accountable to the Welsh electorate. However as per the example set by the Scotland Parliament, which has had such tax varying powers since it was formed but has chosen never to utilise them, I suspect that a Labour/Plaid Cymru-controlled WAG also would probably just take the politically cowardly route of not using them either. The fact is if you continue to do the same old things, you will continue to get the same old results -- its time for some new and radical thinking in Wales if we are to radically improve our economic situation.

Quote of the Day (dumbed-down-edition)

Katharine Birbalsingh, a deputy head at a South London school, speaking yesterday at the Conservatives conference, revealed that even children know exams are being dumbed down:

"When I give them past exam papers to do from 1998, they groan and beg for a 2005 or 6 paper, because they know it'll be easier. The idea of benchmarking children and letting them know how they compare to their peers is considered so poisonous by us teachers that we don't ever do it."

Whatever your views on education, its well worth watching her full speech here (forward to 1h17).

The hardest cut? (updated)

Last week I delved into the actual figures announced in the June emergency budget to separate fact from fiction in the debate about cuts. As we saw, even at the reduced pace of spending proposed by the coalition government (which still sees nominal spending rising year on year) our national debt is set to double from £900bn this year, to £1.3 trillion in five years time. Furthermore we saw how currently the UK is running the second highest budget deficit behind Ireland, how our debt has grown faster over the past five years than any other country bar Iceland, and how the actual size of that public debt is now nudging towards that of Italy and Japan. Under these circumstances I see little realistic alternative to the spending slowdown proposed by the coalition government.

However, the reaction to the Chancellor's announcement yesterday that Child Benefit (£20.30 per week for the eldest child and £13.40 per week for each subsequent child) would be withdrawn from 2013 onwards for all families where one parent earns more than about £44,000 p.a. shows just how difficult the task actually is. On the face of it ceasing the payment of benefits to people who are earning enough in theory to not need it should be an easy sell -- but the outrage of the media proved otherwise, and of course the whole policy was not helped by the revelation that as the Revenue's tax computer's don't know who is married to who (or living together, etc) a single mother earning £45K would lose her child benefit, while a couple both earning £43K would still receive it.

The worrying thing is that this is just the first 'cut' to be clearly outlined. Many, many more will be announced at the Comprehensive Spending Review on the 20th October. If we as a country -- despite the direness of our financial situation -- cannot accept the removal of benefits for those earning in the top 20 percent of the population, what hope is there that we will accept the much more serious cuts? 

As a percentage of GDP our public debt (not to mention private and corporate debt) is amongst the highest in the world; if we continue to put off paying it back we will be spending ever more in servicing the interest of that debt (currently £43bn per year, rising to £66bn by 2016) and over time it will impair our country's ability to deliver essential services and pay out even the most needed benefits. We already pay more on debt internest than we do on the Armed Forces -- at a time when our servicemen have been losing life and limb in Afghanistan because of lack of equipment. The sad fact is that the longer we put it off, the more likely that higher taxes and/or higher interest rates will result, which would present even more problems for our private businesses on which we need to rely for growth. Whichever way we look at it, the longer we leave it, the more painful and prolonged it will be.

UPDATE 19:45: The former Chief Secretary to the Treasury, who left the note saying "I'm afraid there is no money left", has now written an article attacking the coalition for cutting benefits for high earners. I would laugh if I wan't already crying so hard.

UPDATE 22:15: It looks like the Media might have badly misjudged the public's reaction to the move to end child benefit for higher earners:

A further 86 percent agree with the £500 a week limit on Benefit payments too. More here.

Cuts: separating fact from fiction (updated)

There is far too much overblown rhetoric both in the mainstream media and in the blogosphere regarding "cuts" (such as this from Plaid Wrecsam and this from Everyone's Favourite Comrade) which is both full of inaccuracies and based on lazy assumptions. Accordingly the Druid Statistical Research Centre © has taken a closer look at the actual figures announced in the June Budget because there is scant little evidence that anybody else has bothered to do so.

However, first of all, lets put what we are about to analyse into context. In order to make the point that government debt is not historically high, several bloggers have been displaying the following chart (for example here):

Its easy to look at this and conclude (as many have done) that actually public debt is fairly minuscule compared to how indebted the country was following the accumulated debt of having fought two world wars. However the problem with this chart is that it represents public debt as a percentage of GDP at the time. As current GDP is approximately four times larger, it is illuminating to view the same figures adjusted for inflation:

This is chart uses exactly the same dataset but with the figures adjusted to represent the real value in 2005 pounds -- and shows very clearly our current national debt is virtually as high in real terms as it was following the devastation wrought on the UK's finances of having fought two world wars. Clearly this is not a good position to be in -- however the common fallacy on seeing this graph is to mistakenly assume that the 2010 peak is a summit like the peak around 1946, and that the 'cuts' which the coalition government are about to implement will see this debt falling rapidly from here on in. Unfortunately, as we will see, that is not the case. The point on the chart with which we should be comparing our current level of indebtedness is in fact around 1940 as, despite the apparent "ferocious cuts", public debt is set to double between now and 2016.

Don't believe me? Lets take a look at the figures.

Here is how much the current coalition government is actual planning to spend each year from now until 2016. (Just in case you don't believe government figures, all the data I am using from here on in comes from this report (pdf) from the quasi-independent Office for Budget Responsibility. In every case, the figures for '08-'09 are actual, those for '09-'10 are estimates, and those thereafter are OBR forecasts).

click to enlarge

So despite the rhetoric of "eye-watering" and "blood-curdling" cuts, the reality is that in nominal terms government spending is actually set to rise each year until 2016. So where are the cuts? Well, these figures are not adjusted for inflation, so in real terms spend is actually going to be remaining pretty static -- but that is still not a cut. Lets look a little closer at these spend figures:

click to enlarge

These are exactly the same spend figures but now broken down to show how much is current expenditure and how much is capital expenditure. Current expenditure represents the day to day costs of running government services and includes things like civil service salaries. Capital expenditure represents the costs of buying fixed assets, like schools or hospitals for instance. Now we can see that planned capital expenditure is being reduced year on year, in order to protect current expenditure -- in other words the government is planning to reduce spend on building things in order to protect public sector jobs. I think we can all agree that protecting front line services and jobs should be the government's first priority - and this appears to be what the coalition is trying to do.

I said earlier that public debt is actually set to double from current levels by 2016 -- why is this? Well, lets compare the above government spend with forecasted receipts (i.e. total government income from taxes, etc) over the same period:

click to enlarge

The blue bars represent the same government spend figures we looked at above, the green bar shows how much revenue the government expects to receive each year over the same period. As you can see there is a considerable gap between spend and receipt -- i.e. the deficit -- all of which needs to be covered by government borrowing. Why is there such a large gap between income and spend? There are several reasons:

• decreased tax income due to companies make less profit, wages being depressed, and more people being unemployed;
• increased social security payments to cover the greater numbers of unemployed;
• increased interest payments as government debt increases;
• the fact that the size of the state has anyway been artificially increased over time beyond the public's willingness to pay for it through taxes (in fact the last time receipts exceeded spend was in 2001, every year since then the government has spent more than it earned).

So what about the costs of bailing out the banks? Indeed just yesterday another blog shortlisted for the "best welsh political blog" category, Everyone's Favourite Comrade, wrote this:

"The only reason that we have a deficit is because all the money was given to the banks"

This, I'm sorry to say, is complete nonsense. The cost of re capitalising the failed British banks came to £117bn and those costs were spread out over the years 2007-09. There is no subsidy to banks included in the current deficit, and indeed Gordon Brown was running a deficit long before the Northern Rock debacle in 2007.

Anyway, here's the forecasted borrowing figures (i.e. deficit) between now and 2016:

click to enlarge

Of course another way of describing the deficit is as the rate at which national debt grows each year -- accordingly lets take a look at what effect this deficit will have on Government debt (and bear in mind that the £771bn figure is the 2010 'peak' in the second chart above):

click to enlarge

So as you can see, even at this pace of 'cuts', government debt will effectively double to £1.3 trillion by the end of the parliament. And remember the government doesn't really have debt -- it is actually our public debt, which we (and our children, and our children's children) will have to pay back. And indeed we are already paying it back -- take a look at the amount the government is forecasted to spend on interest alone as the total debt spirals upwards:

click to enlarge

Yes, thats right, interest payments are going to double too. The figures involved here are so huge it might be difficult to understand them unless we put them in context. Accordingly I have added the amount the government will spend on debt interest this year, and the amount it is forecasted to spend in 2016, into a chart of departmental spending for 2010-11:

click to enlarge

So as you can see, current debt interest is the fourth largest single government expenditure -- more than we spend on defence, police spending, the environment, and twice what we currently spend on transport. By 2016 however, debt interest will have risen to be almost half of what we spend on the NHS! What a tragic waste of money. I can only wholeheartedly agree with Lord Myners, Gordon Brown's City Minister, when he said:

"There is nothing progressive about a government that consistently spends more than it can raise in taxation and certainly nothing progressive that endows generations to come with the liabilities incurred in respect to the current generation."

If only he had said so when he was still in Government.

Anyway moving on, what of the arguments put forward by various Labour (and Plaid) politicians that you "can't cut your way to growth", implying that it is illogical to reduce government spending at a time of limited demand as that will only exacerbate the situation? Well this is what a favourite of this blog, Nouriel Roubini, the professor of economics of NYU, had to say about the cuts versus stimulus debate:

"The policy dilemma is that you are damned if you do and damned if you don't. You have large budget deficits, there has been a large monetisation of these deficits, near zero rates, Quantitative Easing [Ed: printing money to you and me]. On one side if you exit too soon in terms of fiscal stimulus and the recovery is still too weak there is a risk that you fall back into recession and deflation. On the other side, if you don't want to make that mistake, you say "no, lets maintain this stimulus", then deficits and debt are becoming already large - 10% of GDP deficits in most advanced economies, public debt rising towards 100% plus in the next few years, therefore either you have a fiscal trainwreck down the line, or you monetise these debts and eventually youre going to have high inflation and high loan rates are going to begin and crowd out the recovery. So its an extremely delicate trade off in this debate between growth now and fiscal and monetary austerity now."

As he says, its a very delicate trade-off with huge potential pitfalls on both side of the argument. Do you risk borrowing more to stimulate the economy and end up with large increases in debt and interest payments plus probably runaway inflation, or do you start to cut too early and plunge the economy into a double-dip recession and deflation? My own personal opinion based on all the evidence is this:

• Even at the coalition's proposed rate of slowed down public sector spending, the national debt is set to double to £1.3 trillion. This already means that in five years time our public debt in real terms will dwarf the debt the country ran up in fighting two world wars. If the country was to borrow even more now to attempt to stimulate the economy what will be the resultant debt? What will be the annual interest payments on maintaing those levels of debt? How many generations will it take to pay it off? 
• If we were to continue to spend, how much would the government realistically need to spend to adequately stimulate the economy into growing? This is an important question as there is no point in increasing borrowing for no outcome. The US last year implemented a stimulus package worth $800bn -- the equivalent of almost 5% of their $15 trillion GDP -- yet the returns have been meagre, so much so that Obama is now discussing implementing a second stimulus. Are we sure that we want to go down this path with no guarantee of returns?
• What is likely to happen if we decide not to stimulate and also not to reduce public spending? In this case the likely result is that there will have to be either higher taxes and/or higher interest rates, which will lead to a new round of private sector job losses -- i.e. further turmoil in the wealth generating sector of the economy.
• In addition if we continue to spend without any credible plan to pay back our debt, then we are likely to lose our AAA debt rating with untold consequences in terms of debt interest repayments.
• Finally it is by no means certain that there are no more structural economic shocks in the pipeline - therefore it is certainly prudent to attempt to get our financial situation into better shape now in anticipation of further economic troubles.

Accordingly, on balance, I'm afraid that there appears to me to be little realistic alternative paths to that currently being adopted by the coalition government. 

UPDATE: Certain commenters have asked me to clarify how the UK compares to other international governments in terms of accrued debt. I am happy to oblige. Here are the OECD's figures for total government debt as a percentage of GDP for the most recent year available, 2009:

click to enlarge (Japan figure for 2008)

And to demonstrate the trajectory of growth of debt, based on the same OECD figures, the following chart illustrates how much debt has increased over the five year period of 2004-2009:

click to enlarge (Japan figures for 2004-08)

(source: here)

UPDATE 2: As luck would have it, the Economist published just yesterday the below chart comparing the budget deficits of various countries as a percentage of GDP:

So to recap these international comparisons: the UK is running the second highest budget deficit behind Ireland, the UK's debt has grown faster over the past five years than any other country bar Iceland, and the size of our debt is nudging towards that of Italy and Japan. I'm afraid I would find it difficult to argue against a period of prudence if we want to avoid a much more serious economic trainwreck down the line.