Cuts: This is just the begining

So we have now had the Comprehensive Spending Review. Gideon has swung his axe - with half a million public service workers set to lose their jobs and perhaps another half a million jobs at risk in the private sector. There has been an interesting game going on in the media, trying to pin down just who exactly is responsible for the position the UK now finds itself in.

The Coalition tells us it was all Labour's fault; they were profligate with public money during a boom. Labour on the other hand, say that the Tories are cutting for ideological reasons; they want a smaller state and are making the cuts for this reason alone. The Trade Unions say that this mess was caused by the banks; the banks created this crisis and it is public service workers who are paying the price.

For the state to do something it needs money and therefore must raise taxes. Historically, governments have been able to gather slightly less than 40% of the Gross Domestic Product (GDP). Conservative, as well as Labour governments have tried to increase this tax yield from time to time without success. They ultimately failed due to tax revenues reducing during recessions. Government spending over this period has been generally slightly higher than 40 % of GDP, and during Gordon Brown’s tenure, this rose to 48% of GDP. Some of this rise is directly due to the recession and some the ‘stimulus package’, introduced as an emergency measure to stop this recession spiralling into a depression. If we ignore this spending, there is still a 6% difference between what the government raises and what it spends, known as the ‘structural deficit’. This does not include PFIs or the bank bailouts, which are conveniently not on the government’s books.

There is a valid argument that Labour needed to run this structural deficit to repair the public services and infrastructure following 18 years of Thatcherite neglect. How well Labour spent its money is a contentious issue. Sir Philip Green’s review of government spending makes for interesting reading, and his conclusion that there was extravagant waste is supported by a decade of Private Eye articles.

There is a much deeper problem facing public services and government spending in the UK, which politicians have occasionally mentioned over the last 20 years, but have failed to properly address. We have an ageing population. The generation of ‘Baby Boomers’ are now approaching retirement and collecting their state pensions. As they leave work taxes will fall and government spending will rise. If we are to keep our pensioners out of poverty, then we will have to pay an ever larger slice of tax revenue on the state pension. This will mean that governments will have to do much less in other areas or take a lot more in taxes from a smaller working population.

What we have come to expect as the Welfare State has been facing this impasse from almost its creation, yet repeated governments have not faced the issue. I was taught about greying populations in a GCSE geography lesson in 1993, with all its obvious economic implications. It is perhaps the greatest weakness of democracy that politicians will always follow the path of least resistance. You don’t get many votes telling people the truth, asking for more money or reducing benefits. The politicians and the voters have instead thought only in the short term, preferring tax cuts and empty rhetoric about world class public services full of consumer choice.

The banking crisis was the trigger, but it is not as the unions are arguing, the cause of this mess. Blame lies with successive governments who have failed to reasonably prepare for an easily predicted problem. They were aided and abetted by a generation who have taken from the Welfare State, without adequately paying towards its sustainability. Their children and their grandchildren will have to pay higher taxes for inferior public services.

This spending review is merely the tip of the iceberg. The state will be reduced and the UK population is going to have a bleak few decades to endure. Many Tories will take pleasure in shrinking the size of the state, but where are the other options? They will probably go too far, too quickly, and we will need to be vigilant in protecting the most vulnerable in society and the most cherished of our public services. It is certainly unlikely to be fair and we are definitely not all in this together – however there seems to be few viable alternatives available.

Forget the cuts: tuition fees will be the first test of the Coalition’s resolve

Yesterday the Lib-Dem membership received an e-mail from Vince Cable ruling out “a pure graduate tax”, adding that “while it is superficially attractive, an additional tax on graduates fails both the tests of fairness and deficit reduction”.

What this actually amounts to, is that despite the best efforts of Vince and David Willetts, the Treasury would not wear a graduate tax. It was always going to be tough to get a ‘tax’ past the Conservatives, especially one which would disproportionately affect upper middle-class families. It would have also been difficult, as there would be an interim period between tuition fees being phased out and graduate tax funding paying into the system.

Vince cited three problems of a graduate tax, which he maintains would make it unviable. Some graduates would end up paying more than the cost of their education; UK taxes would not be able to be collected from foreign students; and a graduate tax would not help reduce the deficit over the next five years.

The first two reasons do not seem particularly insurmountable. I suspect that it would only be a minority of graduates on obscene salaries who would pay “many times more than the cost of their course”. Foreign students could pay the cost of their studies, in full, upfront. However it is the last problem which has decided government policy, a graduate tax would indubitably add to government spending over this parliament - but it would be progressive in the longer term.

Quite how this fits with Nick Clegg’s speech on the 18th of August, where he said: “governing for the long-term means thinking not only about the next year or two, or even the next parliamentary term. Governing for the long-term means recognising that the decisions of one generation profoundly influence the lives and life chances of the next”, is anyone’s guess.

This announcement will be of serious concern for the 57 Lib-Dem MPs, 54 of whom including Nick Clegg and Vince Cable, signed the NUS pledge to oppose any rise in tuition fees. If a graduate tax is dismissed, then tuition fees will undoubtedly have to rise, with some reports of students being charged £10,000 a year. Each of those MPs will have to decide whether abstaining will honour that pledge, or whether they will have to vote against the government.

This is a major headache for the Lib-Dem leadership, and if it is not handled well, Nick and Vince may find their party in open revolt. The abolition of tuition fees is a policy which has support from virtually all activists and by signing the NUS pledge, the MPs have no space for manoeuvre. They will either be disloyal rebels or proven hypocrites. Either way, this will provide a large stick for their opponents to beat them with.