Thursday, 21 October 2010

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.

1 comment:

  1. I think the pension timebomb goes back to one fundamental mistake that was made when the state pension was first introduced, if only it had been stated as 'you will get a pension for the last x% of your natural life' rather than 'from the age of', then we wouldn't have been in this situation. I'm shocked that we still haven't moved to a system based on percentage of life expectancy, surely introducing this for people just starting their working lives makes sense?