ON WEDNESDAY the Chancellor will announce whether he plans to stick to the government’s pledge that debt will fall as a share of gross domestic product (GDP) by 2015/16. Worse than expected growth forecasts make it more – not less – vital that he sticks to that plan.
Economic forecasters are lining up to predict that the government is set to miss the target. The Institute for Fiscal Studies (IFS) predicts the shortfall will be £16-27bn; Citigroup’s estimated overshoot is £40-50bn. The IFS has urged the government to ditch a target it sees as a poor measure of financial sustainability. The Chancellor should resist these calls on economic, moral and political grounds.
Britain has a public spending problem that is pushing government debt into the economic danger zone. According to the OECD, UK public spending between 2000 and 2010 rose by 14 per cent of GDP. It remains a fraction below the debt-wracked Eurozone average. There is a correlation between high levels of public spending and sluggish growth. But the worrying evidence relates to the economic impact of total debt that flows from higher interest rates, loss of market confidence, crowding out the private sector, and more vulnerability to crises.
A 2010 report for the International Monetary Fund (IMF) found that a 10 per cent increase in debt to GDP slows growth by 0.2 per cent per year and, when debt hits 90 per cent of GDP, growth suffers in advanced economies by an average of 1.3 per cent per year.
How close is Britain to the danger zone? According to the IMF, this year UK gross government debt hit 89 per cent of GDP – with net debt at 84 per cent. It has doubled over ten years, a trajectory which, if unchecked, will fly past the 90 per cent tipping point within 12 months. The target may be artificial, but the reality remains dire.
There is a compelling moral dimension, too. In 2010, the National Institute for Economic and Social Research estimated that total UK public debt was the equivalent of leaving each child growing up today with a tax bill of £200,000. Such unfairness dwarfs the current gripes over cuts. Likewise, aside from the political embarrassment of abandoning a key economic benchmark, the public at large will not understand how a five year austerity programme can lead to exponentially rising debt.
How should the target be met? We could learn from the experiences of Mark Carney, the new Canadian governor of the Bank of England. Canada cut its deficit in the 1990s by questioning whole areas of government activity – rather than merely salami-slicing budgets. The UK government still has ample scope to adopt a similar approach.
Britain has twenty central government departments that inflate capital and administration costs. The US has 15 federal departments, Germany has 14. Even high-spending social democracies like Denmark and Sweden have fewer ministries than we do. Options for consolidation include merging the two environmental departments, dovetailing the Department for International Development back into the Foreign & Commonwealth Office, abolishing the Department for Business, Innovation and Skills (hiving essential programme spending into the Treasury), and cutting the Government Equalities Office (which duplicates the Equalities and Human Rights Commission).
These modest measures alone would save up to £20bn each year and enable the government to spare frontline public services and avoid harming the economic recovery. As the number of government ministers shrank, coalition politicians would also be in a stronger position to cajole the public with its signature theme tune that “we are all in this together”.
Beyond Whitehall, bringing troops home from Afghanistan a year early would save £3.6bn. If EU budget negotiations led to the repatriation of the ‘structural funds’ to help poorer regions, the UK would save another £3.5bn per year.
This way, the government could start to tackle the debt, not just the deficit, and create enough headroom to deliver a cut in business taxes that would boost growth and generate revenue, sparking a virtuous economic cycle.
The public recognises that turning government debt around is like an oil tanker reversing course. But, five years is long enough for even the bulkiest of carriers to change course.
Dominic Raab is the Conservative MP for Esher & Walton.