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David Cameron’s curse: To save the UK economy and be hated for it

David Cameron

I am not sure I like David Cameron, the UK Conservative party leader and the likely next prime minister of Great Britain.

I’m more sure I don’t like his sidekick George Osborne.

Yet I do feel sorry for them.

I don’t pity them because of how the media paints them as gilded toffs (it seems accurate), or because they have to sit facing miserable Gordon Brown in Parliament (talk about a bad day at the office!)

Rather, I feel sorry for them because now they have successfully moved the issue of spending cuts onto the public agenda — despite the efforts of the obfuscating Labour front bench — they have set off on a path that will see them slashing expenditure both wasteful and not so wasteful, which they need to do if Britain is to remain solvent.

If they manage to get our economy back into balance without riots, they’ll deserve the knighthoods they’ve probably been writing in front of the names on their diaries since age 13 and 3/4.

But we should give them their knighthoods now.

Because if we wait ten years until the deed is done, they’ll be so hated by the forgetful and hard-pressed British public that all the duck moats in their backbencher’s mansions won’t save them from the mob.

This is Cameron’s curse — to do the right thing, to save the economy, and to be hated for it.

He will go down in history as a right wing hack-and-slasher, and the public will forget he was performing emergency surgery.

Cuts are on the agenda whoever wins

The cuts that Cameron’s Conservatives will need to inflict — or the tax rises required — are massive.

Here’s how Martin Wolf, the Financial Times‘ brilliant economics commentator, put it back in June, when Gordon Brown was still up to his neck in denial:

The fiscal position has become a huge medium-term challenge. It is also an obvious symptom of gross policy failure: structural public sector net borrowing is estimated by the Treasury at 9.8 per cent of gross domestic product this financial year.

This horrendous figure is the result of four mistakes:

  • An overestimate of sustainable GDP;
  • Slippage in the fiscal position in the years up to the crisis;
  • An exaggeration of sustainable revenue;
  • And a surge in real spending, as a result of unexpectedly low inflation.

Next financial year, as a result, the British government is forecast to spend £4 for every £3 it receives.

More precisely, spending is forecast at 48.1 per cent of GDP in 2010-11, up from 40.8 per cent in 2008-09, and current receipts are forecast at 36.2 per cent of GDP, down from 36.9 per cent in 2008-09. By 2013-14, spending is forecast to be down to 43.4 per cent of GDP, while receipts rise to 37.9 per cent.

Thus, under Labour’s plans, three quarters of the improvement in the fiscal position would come from a fall in public spending, relative to GDP. Spending is to grow far more slowly than GDP over many years – indeed, under plausible assumptions, for a decade.

As Wolf makes clear, spending must fall — even Labour admits it in their maths, even if they lie to the electorate as the campaign to make Cameron a scapegoat begins.

Nobody likes to be saved from themselves

We’ve been here before with Margaret Thatcher.

In the 1970s Britain was an economic basket case. Monevator‘s younger or further-flung readers might not realise we had a three-day working week in the 1970s as the country ground to a halt, that we were bailed out by the IMF, or that at one point striking unions left the country under mountains of uncollected rubbish and the dead unburied.

The union movement had begun as a noble effort to get decent working conditions for ordinary people.

Yet at the height of its power in the 1970s it played political games as union leaders with more sympathy for Moscow than Macclesfield held the country to ransom.

Margaret Thatcher came in, smashed the unions, dismantled Britain’s uneconomic industrial legacy, and turned the UK around.

Yes, she was uncompromising, but she did what was required.

She was also widely misquoted.

For instance, you’ve probably heard she said “there’s no such thing as society”.

Here’s what she really said:

“They are casting their problems at society. And, you know, there’s no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbours.”

While the longer quote will still rub left wing radicals up the wrong way, I think it will strike most readers as entirely sensible. We’d certainly have a less soul-destroying dependency culture if people had listened to what she said, instead of parodying it for 20 years.

But then, few people were grateful once the rubbish was trucked away and the funeral backlog had been cleared.

When I was in school, Thatcher was labeled ‘the milk snatcher’ because she shockingly believed it was the place of parents — not local authorities — to provide food for their children.

Who knows what Cameron will be called, but it won’t be so flattering.

It’ll be worse than under Thatcher

The fiscal situation Cameron is inheriting is even more dire, after Labour grew used to wasting spending the country’s prosperity on everything from profligate public services to idiot wars.

Specifically, the OECD predicted in June that the budget deficit will be 14% next year.

Recent revisions upward to growth expectations will have tweaked this a mite, but not by much.

The problem is the budget deficit is made of two components, says the OECD:

  • The cyclical deficit: This is the usual shortfall in Government income you get in a recession. It’s about 7% — deep, but not untenable, and you’d expect it to bounce back in better times.
  • The structural deficit: The other 7% is the estimated gap left by the meltdown in the UK’s financial services industry. It’s not the cost of saving the banks — it’s the cost of not seeing all that tax pour in from City companies and their employees for years to come.

Basically, the Government has behaved like a double-glazing salesman who did a one-off great deal with the owner of Crystal Palace then took out a mortgage on it.

It’s committed to spending that we simply haven’t got the income to pay for.

The 7% structural deficit is huge. It’s about what the UK spends on healthcare. In a country where Government spending now accounts for around half of GDP (shockingly!) it’s nearly a fifth of public spending.

As you can see, we’re not going to get out of this by simply rooting out a few Civil Servants who aren’t earning their keep, or getting rid of the Young Lesbian Canary Owner Empowerment programs.

We’re going to have to do that, and much more if we’re not to be crushed by the bond markets, who have already signaled via future yields that the Government can’t expect to keep borrowing forever at today’s affordable rates.

Personally, I think it’s gold-plated public sector pensions that will have to get the chop, not to mention a load of public sector jobs.

Perhaps it’s time we stopped paying for an military wing we can no longer afford, too, especially for all the good it does us on the global stage.

The crucial thing is to keep the important stuff — education, health (especially disease prevention), training and infrastructure — as that’s the stuff that will help us grow in years to come, which is the second part of pulling us out of this hole.

Of course, the OECD could be wrong. The City may bounceback stronger than expected — and the banks on the Government books, RBS and Lloyds, could eventually become more an asset than a liability.

But the sums are so vast, even a 50% over-estimate by the OECD will still require cuts that will cause political mayhem. Thatcher never managed anything as ambitious, yet she still went down in history as the Wicked Witch of Westminster.

Enjoy this year’s Christmas cards, David C. You may never see their like again.

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{ 8 comments… add one }
  • 1 Norman Harris October 5, 2009, 6:32 pm

    Too true. This is one election Labour party strategists should be happy to lose. Maybe that’s why Gordon ‘refuses’ to go. Martyr to the cause to the very end.

  • 2 The Investor October 5, 2009, 7:11 pm

    Exactly. Milliband and the others aren’t fools. In six years time they’ll have a huge record of Conservative cuts to blame on Cameron, and everyone will have started forgetting why the cuts were necessary.

    My cynical latter point aside, I don’t really blame the other Labour hopefuls from hanging back. Gordon was happy enough to claim the credit for abolishing boom and bust. Down with the ship he should go.

  • 3 Lee October 6, 2009, 3:31 pm

    As a public sector employee (albeit on the law enforcement side of the coin), I do fear for the future to a degree. This does not stop me from believing that “what must be done”, needs to be done.

    Spend less than you earn. It’s as true for countries as it is for individuals.

  • 4 The Investor October 6, 2009, 3:49 pm

    At the risk of sounding like an old Colonel Blimp (which I’m really not!) I think law enforcement could be among the more secure public sector areas over the next few years, especially if you’re in the front line. I suspect we’ll see a couple of riots (in the miners’ strike / poll tax mould) before this has played out. 🙁

  • 5 Lee October 6, 2009, 4:06 pm

    Nothing like a good riot to warm the cockles!

    I suspect you’re right, but being prepared for the worst is a good thing. If it doesn’t happen, the prep will not have gone to waste. If it does happen, it won’t be a total financial disaster.

  • 6 Niklas Smith October 6, 2009, 8:20 pm

    Next financial year, as a result, the British government is forecast to spend £4 for every £3 it receives.

    If Martin Wolf think that’s bad (and it is!), how about the USA, where 43 cents of every federal dollar spent at the moment is borrowed?

    Another question of fact: surely the structural deficit identified by the OECD is not just made up from permanently lost tax revenue from the City? After all, Gordon Brown as Chancellor was running budget deficits several years running even in boom times. I think a large chunck of the structural deficit is simply the result of spending more than was coming in as a way of trying to win votes, or perhaps to “build a fair society”. (Forgive my cynicism, but I don’t see how any kind of fair society can be built upon heaping national debt, student debt and unfunded state and public sector pensions on young people like me!)

    Bitching at Brown over, this is an excellent post. You’ve succeeded in making me feel a bit sorry for David Cameron, which is quite an achievement (I’m a Lib Dem). I don’t hate him particularly but I’ve never warmed to him; he’s never struck me as someone with an attractive vision of a better society.

  • 7 The Investor October 7, 2009, 9:18 am

    Hmm, I think you’re right that the structural deficit is the result of long-term overspending, but as I understand it (I may be wrong!) this overspending was supported by tax revenues that have evaporated ‘forever’, most obviously from the City. Hence why commentators put it down to the collapse of the City. i.e. If North Sea Oil Rigs stopped pumping 12 months ago instead of the Square Mile machine, it would have amounted to the same thing.

    So partly semantics, but the point is it’s not simply the result of X% less corporate/income tax being raised all around due to the recession, as I read it.

    Regarding your closing political paragraph, I’m one of those weird people who thinks it’s best not to say/you you’ll always vote for a particular party, unless you’re a true believer and activist. I think democracy is best served by people listening to all the arguments anew every five years, and making their mind up then (which is what happens at the margins anyway), rather than having tribal affiliations that stand whatever happens — the grief the Iraq war caused some ‘Labour til I die’ friends being a case in point.

    Thanks for your comments Niklas, haven’t heard from you for a little while.

  • 8 corsham September 12, 2010, 4:03 pm

    Hello

    I think its only fair to let you know…
    On 7th of September 2010 I placed a “curse” on David Cameron. This curse will only be lifted when David see’s sense and stops making excessive cuts. If David continues with the cuts “en-masse” I will also have no choice but to place a curse on the rest of the coalition policy makers.
    It hurts me to have to do this, but the cuts you intend to initiate are too much, too fast and will hurt millions of people.
    Remember, once David see’s sense, the curse will be at an end.
    Please take note that this is not a crank mail and my sentiments are very real.

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