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Britain needs very large spending cuts

Allister Heath
GENERAL Motors&rsquo; sensible sale of its Opel/Vauxhall division to Magna, the Canadian firm, has already prompted fresh demands for more handouts to ensure car production remains in the UK. The Germans, after all, have pledged cash to save Opel jobs; so we should do the same with Vauxhall before it is too late &ndash; or so the bien-pensant argument goes. But while any job losses anywhere are always tragic, it would be a mistake for Gordon Brown to bail out the UK car industry anymore than he has already done.<br /><br />Britain is facing an immense fiscal crisis. We are not about to go bust, nor even to lose our AAA-rating on government bonds (after all, the credit agencies thought that CDO-squared products made out of sub-prime mortgages were AAA, and even we are not in that much trouble). But it will be desperately urgent for the next government to reduce the size of our national overdraft. The forecasts are horrendous: the Treasury thinks borrowing will peak at &pound;175bn, or 12.4 per cent of GDP, in 2009-10; the European Commission predicts 13 per cent; the IMF 13.3 per cent in 2010; and the OECD expects the deficit to reach 14 per cent of GDP in 2010.<br /><br />This is mind-bogglingly bad &ndash; but I have even worse news. Between 2000 and 2007, even before the current crisis, public spending had already increased by 7.5 percentage points of GDP. By next year, this will have jumped by another ten points, meaning that public spending is projected to be 17.5 percentage points of GDP higher than it was in 2000. In other words, close to an extra fifth of the economy has been nationalised by the state. This is completely unsustainable, for many reasons. <br />Here is just one: public sector productivity fell by 3.4 per cent between 1997 and 2007. During the same period, private sector productivity increased by a total of 27.9 per cent. Had productivity growth been this high in the public sector, the government could be producing the same level of services for &pound;58.4bn a year less. No wonder that Fiscal Studies magazine has calculated that every percentage point increase in the share of government consumption in GDP reduces the equilibrium GDP growth rate by 0.216 percentage points.<br /><br />There is only one way forward: we must slash public spending, as explained in an excellent report out today and jointly authored by the Institute of Directors &ndash; Britain&rsquo;s top grouping of company directors &ndash; and the TaxPayers&rsquo; Alliance, Britain&rsquo;s most influential free-market group. It contains a series of recommendations to reduce public spending by &pound;50bn, which would be a good start. Programmes such as the Eurofighter, Sure Start and identity cards need to go; the IoD/TPA report also recommends cutting the number of civil servants by 10 per cent, among many other detailed ideas. Many of these cuts will be extraordinarily painful; but we have no real choice. The private sector has suffered a devastating recession; the public sector is next in line.<br /><br />In the 1990s, the Canadian government reduced its budget deficit from 9.1 per cent of GDP to zero in five years, and has proceeded to run surpluses in almost every year since. It achieved this almost exclusively through reductions in public expenditure &ndash; between 1992 and 1997, spending fell by 9 percentage points of GDP, while taxes hardly rose at all. Our task is even greater and far more urgent.<br /><br />allister.heath@cityam.com