UK deficit - cuts are the only way
Discussion
Nice bit of broker research this morning. Tullett Prebon UK macro said:
With Coalition government’s deficit reduction plan doomed to failure, tax cuts are the only policy left for the Chancellor and he must take it.
Global and UK growth is below target and the deficit reduction plan simply won’t work. Revenue growth will fall far short of expectations, and “automatic stabiliser” spending will undermine the anticipated reductions in expenditures, leaving the deficit at close to 8% of GDP in 2015-16, rather than the 1.5% projected by the Treasury. Moreover, the recent lamentable and misdirected climb-down over public sector pensions strongly suggests that the government might weaken over its spending plans
When the government misses its deficit reduction target, which of the following explanations might get the best response from the bond markets?
1. “Britain has missed its deficit target because growth hasn’t happened”
2. “Britain has missed its deficit target because the government failed to cut spending sufficiently”
3. “Britain has missed its deficit target because taxes have been cut in pursuit of growth”
If we recognise that the sovereign debt crisis is predominantly a growth rather than an absolute debt issue, then the third of these alternatives is far more likely than either of the others to forestall bond market problems. Yet advocates of stimulus amongst the government’s opponents always advocate using stimulus in the form of higher spending, and almost never advocate the alternative, which is to stimulate the economy by cutting taxes instead
So how much can the UK cut spending by?
This question needs to be seen within the context of the real performance of the British economy over the period prior to the financial crisis.
Between 1999-2000 and 2009-10, public spending increased by an annual compound average rate of 3.9%, far higher even than reported economic growth (1.5%), let alone growth on an underlying (ex-borrowings) basis. At constant values, spending increased from £451bn to £690bn. The share of GDP absorbed by the state climbed from 36% to 41% even before the global crisis combined with the ending of the borrowing binge to hike the ratio to 48%.
Had spending risen by a more modest but still significant annual real rate of 2.7%, public expenditures would have remained at about 36% of GDP before jumping to 41% during the economic slump. At a real growth rate of 2.7%, government spending in 2009-10 would have been £70bn lower at about £620bn. At the suggested level of affordability, then, government would aim to reduce public spending in 2015-16, not to the planned £670bn, but rather to £620bn, a saving of £50bn over and above the more modest target set by the Treasury.
So £50bn then. But where will the savings come from?
The government needs to raise pensionable ages for the public sector in order to align them with state pension ages and, second, to increase pension contributions on a sliding scale, such that contributions paid by low earners should be increased only very modestly, whilst the contributions required from middle- and high-earners should rise very appreciably. Such changes could save the state at least £8bn by 2015-16, whilst having very little impact on the contributions required of the low-paid.
In addition to the basic state pension, the elderly receive additional benefits which cover winter fuel costs, free bus-passes and subsidised (or free) television licences. Whilst admirable in principle, these payments are made to all pensioners irrespective of income. Introduce means-testing in order to confine such payments to pensioners on low incomes. There is no case for making such payments to affluent people simply because they happen to be of retirement age. Again, savings made by means-testing these payments should be channelled into sums paid to those who are in genuine need.
Universal benefits such as child benefits and child tax allowances are no longer affordable, but should be provided only to those on low incomes. One recent study calculated that the abolition of “middle class benefits” could save well in excess of £10bn annually.
In summary:
- Tightening the eligibility criteria for out-of-work benefits.
- Moving from payment-in-cash to payment-in-kind.
- Limiting housing benefits to £400 per week.
- Capping the overall amount that any benefit claimant can receive to £20,000.
Tot all that up and you get £50bn.
With Coalition government’s deficit reduction plan doomed to failure, tax cuts are the only policy left for the Chancellor and he must take it.
Global and UK growth is below target and the deficit reduction plan simply won’t work. Revenue growth will fall far short of expectations, and “automatic stabiliser” spending will undermine the anticipated reductions in expenditures, leaving the deficit at close to 8% of GDP in 2015-16, rather than the 1.5% projected by the Treasury. Moreover, the recent lamentable and misdirected climb-down over public sector pensions strongly suggests that the government might weaken over its spending plans
When the government misses its deficit reduction target, which of the following explanations might get the best response from the bond markets?
1. “Britain has missed its deficit target because growth hasn’t happened”
2. “Britain has missed its deficit target because the government failed to cut spending sufficiently”
3. “Britain has missed its deficit target because taxes have been cut in pursuit of growth”
If we recognise that the sovereign debt crisis is predominantly a growth rather than an absolute debt issue, then the third of these alternatives is far more likely than either of the others to forestall bond market problems. Yet advocates of stimulus amongst the government’s opponents always advocate using stimulus in the form of higher spending, and almost never advocate the alternative, which is to stimulate the economy by cutting taxes instead
So how much can the UK cut spending by?
This question needs to be seen within the context of the real performance of the British economy over the period prior to the financial crisis.
Between 1999-2000 and 2009-10, public spending increased by an annual compound average rate of 3.9%, far higher even than reported economic growth (1.5%), let alone growth on an underlying (ex-borrowings) basis. At constant values, spending increased from £451bn to £690bn. The share of GDP absorbed by the state climbed from 36% to 41% even before the global crisis combined with the ending of the borrowing binge to hike the ratio to 48%.
Had spending risen by a more modest but still significant annual real rate of 2.7%, public expenditures would have remained at about 36% of GDP before jumping to 41% during the economic slump. At a real growth rate of 2.7%, government spending in 2009-10 would have been £70bn lower at about £620bn. At the suggested level of affordability, then, government would aim to reduce public spending in 2015-16, not to the planned £670bn, but rather to £620bn, a saving of £50bn over and above the more modest target set by the Treasury.
So £50bn then. But where will the savings come from?
The government needs to raise pensionable ages for the public sector in order to align them with state pension ages and, second, to increase pension contributions on a sliding scale, such that contributions paid by low earners should be increased only very modestly, whilst the contributions required from middle- and high-earners should rise very appreciably. Such changes could save the state at least £8bn by 2015-16, whilst having very little impact on the contributions required of the low-paid.
In addition to the basic state pension, the elderly receive additional benefits which cover winter fuel costs, free bus-passes and subsidised (or free) television licences. Whilst admirable in principle, these payments are made to all pensioners irrespective of income. Introduce means-testing in order to confine such payments to pensioners on low incomes. There is no case for making such payments to affluent people simply because they happen to be of retirement age. Again, savings made by means-testing these payments should be channelled into sums paid to those who are in genuine need.
Universal benefits such as child benefits and child tax allowances are no longer affordable, but should be provided only to those on low incomes. One recent study calculated that the abolition of “middle class benefits” could save well in excess of £10bn annually.
In summary:
- Tightening the eligibility criteria for out-of-work benefits.
- Moving from payment-in-cash to payment-in-kind.
- Limiting housing benefits to £400 per week.
- Capping the overall amount that any benefit claimant can receive to £20,000.
Tot all that up and you get £50bn.
With Coalition government’s deficit reduction plan doomed to failure, tax cuts are the only policy left for the Chancellor and he must take it.
Well thats a lie.
The only strategy than can possibly deliver actual growth [U]without[/U] an equal or greater increase in debt is a strategy to stimulate exports and limit imports.
If we recognise that the sovereign debt crisis is predominantly a growth rather than an absolute debt issue.
Sigh.
OUR "GROWTH" HAS BEEN BASED ON DEBT. TWO SIDE OF SAME COIN.
Well thats a lie.
The only strategy than can possibly deliver actual growth [U]without[/U] an equal or greater increase in debt is a strategy to stimulate exports and limit imports.
If we recognise that the sovereign debt crisis is predominantly a growth rather than an absolute debt issue.
Sigh.
OUR "GROWTH" HAS BEEN BASED ON DEBT. TWO SIDE OF SAME COIN.
I think the only way out of this mess is for the government to be cleverer (fat chance of that) with its money and how it gets its money.
Employ specialists, change the culture of the public sector. Reduce the number of points of taxation.
For example how much does it cost to administer all the different taxes? does it not all go into the same pot in the end?
Roll income tax, ni, council tax into one.
Stop taxes that are in the name of social engineering (green taxes, alcohol tax etc) and put in a flat rate vat on all goods. this may bring VAT upto 25-35% but would cost far less to administer.
Improve the education system.
Run the country more like a business.
Employ specialists, change the culture of the public sector. Reduce the number of points of taxation.
For example how much does it cost to administer all the different taxes? does it not all go into the same pot in the end?
Roll income tax, ni, council tax into one.
Stop taxes that are in the name of social engineering (green taxes, alcohol tax etc) and put in a flat rate vat on all goods. this may bring VAT upto 25-35% but would cost far less to administer.
Improve the education system.
Run the country more like a business.
Happy82 said:
£400 a week housing benefit? Are government aware it's possible to rent for £400 a month in many areas?
But the free loaders want to stay in swanky London. (like the Spanish bloke & his family who couldn't speak English who was on TV the other week. What exactly has HE paid into the system? f
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