Another brilliant piece from Liam Halligan on the inadequacies of the UK’s feeble coalition government, which is dressing itself up as a sheep in wolf’s clothing.
On Wednesday we were told that 490,000 public sector workers will lose their jobs over the next five years. That sounds like a high number and, despite natural wastage and redundancy deals not available in the private sector, this cut will be painful for many of those involved. But it represents merely a return to where the public sector headcount was in 2005. That is by no means a historic retrenchment.
The rest is well worth reading.
Liam Halligan’s gloom and doom is a overdone because he does not take inflation into account. The yield on 10 year Gilts is 3%: the same as inflation. I.e. we can borrow at very near zero percent in real terms.
Even more bizarre are the yields on 5 and 2 year Gilts: 1.5 and 0.75% respectively. I.e. we could borrow for that period and make a significant profit at the expense of lenders. But borrowing short is never wise, so I don’t advocate this course.
For yields, see: http://www.yieldcurve.com/marketyieldcurve.asp
The issue is that Britain must retain the trust of the markets and preserve it’s borrowing privileges into the future. If the international bond markets come to the conclusion that no UK government could cover interest payments with tax receipts without causing revolt then there are two remaining possibilities, direct default or default by hyperinflation. The coalition are aiming to head-off this possibility, I think doing that is quite sensible.
I think that this is an excellent analysis by the Adam Smith institute, done after the emergency budget but before the CSR. Given that the CSR only gave largely-expected details around the budgets of specific departments, the analysis is still relevant.
It shows total managed expenditure barely changing over the next 5 years in real terms, but that the components from interest repayments increase markedly, while capital spending falls sharply.
As others have remarked, this is hardly austerity in the context of numerous private sector enterprises cutting staff by 20%, as well as reducing wages in many cases.
I was reminded of something noted in Thatcher’s autobiography. She observed that since WWII, government and socialist constructs had grown under Labour governments, and that this growth was largely arrested but not reversed during Tory governments. It took real effort for the Thatcher government change perceptions. Thatcher presided over a rise in TME of £288bn (1979) to £304bn (1990), just 5% over an 11 year period – well behind inflation. However, hers is the only post-war government with this kind of record. I would note that the current coalition members are not made of the same stuff as Thatcher – they are pragmatists the lot of them. Given that the difficulty that governments generally have had in reducing spending, and the characters that we know that they are, it would be very surprising to see undue effort made to cut spending above and beyond what is forced upon them by the bond markets.
I should also note that the projections on slight declines in real spending are dependent on inflation 2-3%, whereas the departmental budgets are set in nominal terms, and are for nominal increases. This begs the question “what if inflation does not come through as expected?”
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