Cuts and Protests

London protest
photo Neil Cummings flickr
Spending cuts will be an emotive issue, especially for people facing job losses. But, is the TUC correct to say there is an alternative to the government’s spending cuts? (TUC Link)

UK annual borrowing (PSNB) is forecast to be £149 2010/11 (12% of GDP). This is one of highest peace time borrowing requirements the UK has ever had. We cannot rely on economic growth alone to reduce borrowing to sustainable levels. The government argues that without drastic action the UK could:

  • Face higher interest rates as investors become nervous over size of UK debt. Higher interest rates would lead to lower investment and spending.
  • The government claim, spending cuts would help restore confidence to economy and this would boost growth.
  • Without action, the UK could follow the fate of Ireland, Greece and Portugal in suffering debt downgrades and risk of debt default.

However:

  • UK public sector debt is not the highest in Europe. (excluding financial sector intervention, UK debt is only 58% of GDP. Compared to 144% for Greece, France 83%, Italy 113%
  • Not being in the Euro gives the UK an advantage. The UK can devalue sterling to gain competitiveness – something Portugal and Ireland have been unable to do.
  • UK interest rates on 10 year long term debt is 3.5% compared to 12% in Greece.
  • UK has one of longest average maturity dates for debt – 14 years. This means there is less stress on refinancing debt in short term.
  • Countries with rapid spending cuts Ireland and Portugal have seen their public finances deteriorate. Bond investors have been scared away by the combination of debt, deflation and falling economic growth.

I do believe, it would have been better to delay spending cuts and make them less stringent. The speed and scale threaten to derail a fragile recovery. This will lower growth and reduce cyclical tax revenues.

Long Term Plan

However, we do need a long term plan. This will involve decisions such as raising retirement age and evaluating generosity of public sector pensions.

The TUC are correct to question the necessity for short term cuts, but, they do need to also accept the necessity of making some sacrifices as part of a long term debt reduction plan. You can’t reduce £150bn annual debt, solely by taxing bankers (no matter how attractive that might appear)

2 thoughts on “Cuts and Protests”

  1. “Spending cuts will be an emotive issue, especially for people facing job losses.” I’m not so sure.

    I have a friend who works in the Durham County offices. He says people there are falling over themselves to be made redundant, and because of the generous redundancy pay-offs.

    And according to a Sunday Times article “Councils line up £1.5bn in payoffs” by Robin Henry, council staff get four times as much money on redundancy as in the private sector. Henry got his info from the Chartered Institute of Personell Development.

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  2. Please can you explain something?

    My understanding is that the UK deficit in 2007 was 34 billion, and by 2009 it had risen to a completely unsustainable 150 billion. That’s a 340% increase in two years, and you seem to indicate that the main reason for that increase was unemployment caused by the financial crisis.

    So if unemployment is the main source of the problem, should we be cutting public spending and public services, or should we be working at creating jobs? Clearly the government can’t make money by employing people itself – that would be like trying to push your car while sitting in it – but the government does get cheap labour since all the tax returns to it (plus wage costs are partially offset by lowered benefit costs), and government projects increase private employment too. Employed people spend more. Plus they can and will borrow.

    My main concern would be that cuts will cause further unemployment, and hence lead to an even bigger deficit (less income tax and more unemployment benefit) despite us losing all our public services in the process.

    Am I missing the point here? I would be very grateful for some clarification.

    Reply

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