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 [1] 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 [2], 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% [3] 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 [4] (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.