Welfare state requires a revolution

Allister Heath
FOR once, some good news. The City has become slightly more optimistic about the size of the budget deficit. The consensus view is that it will hit around £171bn for 2009-10; remarkably, this is marginally lower than the £178bn predicted by the Treasury. Not that this should be cause for celebration: even such a slightly better figure would represent a crippling deficit of close to 12 per cent of GDP, the highest for around 60 years. Britain is still in the middle of a fiscal nightmare caused by years of over-spending by a government which simply didn’t think there were any binding constraints to the size of the state – a worldview proved catastrophically wrong when the bubble burst.

So what has changed? Either on purpose or by mistake, the government is spending a little less than planned (although still far more than we can afford). Central government current spending jumped 5.8 per cent in April-January – but much less than the gargantuan 7.6 per cent leap planned for the full year. Current spending may come in 1.5 per cent under budget, saving £8bn-£9bn.

Yet none of this really solves anything. We are still on course for a national debt of well over 90 per cent of GDP in a few years’ time if drastic action is not taken. The International Monetary Fund believes our debt to GDP ratio will hit 98 per cent by 2014, largely because growth is likely to under-shoot the government’s optimistic forecasts. None of these figures include the state’s vast off-balance sheet liabilities, namely pensions for government employees and some private finance initiative projects. No country with a debt level of close to 100 per cent of GDP has a top-notch credit rating; and there is overwhelming evidence that strong economic growth becomes impossible when the national debt rises to these kinds of levels.

For the time being, the markets are working normally: the Debt Management Office has sold £7.5bn worth of gilts over the past couple of days, albeit at highish yields. But neither Labour nor the Tories have come up with a detailed, credible plan to take borrowing back to a sustainable path; and everybody in the City is counting the days to the election, hoping for a clear-cut outcome. The real test will be the emergency budget: the next Chancellor will have one chance at pushing through a credible deficit reduction plan – which will have to include immediate cuts in 2010 to show that he is serious – or else we will face a fiscal, gilts and sterling crisis, with unfathomable consequences for this country’s prosperity and standing in the world.

Cuts will have to come from everywhere – but one area in particular is crying out for a shake-up. Michael Saunders of Citigroup reminds us that spending on benefits accounts for 13 per cent of GDP and 28 per cent of public spending, close to the peaks of the last 50 years. There are two main reasons: millions of middle class voters pay a lot of tax and get a lot of benefits; it would make more sense to cut both. And around 6m adults are on out-of-work benefits, a scandalous waste of resources for a supposedly civilised society. Any proper long-term plan to shrink the size of the state will have to find a way of moving millions of people stuck on welfare back into work. We desperately need to revolutionise the welfare state – as the next government will soon find out, cutting waste and freezing public sector pay simply won’t be enough.