Analysis: Death to the deficit

By Frances Cairncross
Presenter, BBC Radio 4 Analysis

Public spending in the UK has risen in recent years, and some now argue that it will have to be cut again, to help cut the growing budget deficit.

The UK is one of the most indebted nations in the world. How should we tackle the deficit? Frances Cairncross argues that profound cuts in public spending are the only way to balance the books.

It has not really sunk in yet. Britain has moved off the map.

The country is borrowing more money this year than ever before, relative to the size of the economy. That is more than any other large country except - perhaps - the United States.

Worse, the borrowing is still climbing, not falling.

Every five seconds, the country borrows £32,000 - or about one-third more than the average UK worker earns each year.

That is not sustainable. Sooner or later, lenders will take fright, and then we will see interest rates soar and sterling plummet.

What can be done?

Party over

Of course, this is partly the result of the recession. It has hit tax revenues badly.

Those financial fat cats criticised so often in the press also paid lots of tax - a fifth of income tax revenues is paid by just 1% of taxpayers.

And in hard times, government spending rises, as more people claim unemployment benefit.

Add on the stimulus, and you can see why public spending is still roaring upwards.

In fact, the trouble started well before the recession began. Successive governments have spent more than they collected in tax for many years.

The Thatcher government plugged the gap by selling off state assets; the Blair government by borrowing.

Now, the party is over. The recession may just have brought us to the end of this road a bit earlier than might otherwise have happened.

So can we not just raise taxes and carry on?

Taxes not enough

That is what Graham Turner of GFC Economics advocates. He thinks the corporate sector should be paying more in corporation tax.

Radio 4's Analysis Broadcast on Mondays at 20:30 Listen here Or subscribe to the podcast The repeat is on Sundays at 21:30

"I do think we need to focus on those companies that weren't paying their way even during the boom, " he argues.

"And I think we need to change the law, so that companies can only have a write-off for one year, and they have to start paying taxes as soon as they make any profit," he adds. "If not, they are opting out of their responsibilities."

But the trouble is that corporate tax revenues are small relative to our vast deficit: £35 billion this year, against a deficit heading for almost £200 billion.

Big money has to come from income tax and National Insurance - and not just on the rich.

But tax rises may not bring in enough money.

Graham Turner argues the corporate sector should be taxed more.

For a generation or so, it has proved extremely hard to get the tax take above 38 per cent of the economy. Repeatedly, the Treasury has found tax revenues running below the levels it forecast.

So it will be spending cuts, and on a scale that none of us can recall, that will have to plug the gap. The government will have to reduce public spending by at least ten per cent, and maybe 15%, fairly quickly.

This will hurt.

Last time we borrowed too much, back in the 1970s, we had rampant inflation. That cut back the value of our borrowings. It also reduced the value of tax allowances, so everyone paid more tax almost without noticing.

Now we have no inflation to hide the ugly truth.

East of Suez

So we are entering another era.

Tony Travers, an expert on public finance at the London School of Economics, talks of an 'East of Suez' moment - referring to the 1960s, when Britain realized it could no longer run an Empire-scale foreign policy.

Public spending cuts must be across the board so no area escapes scrutiny Dame Rachel Lomax, former Deputy Governor of the Bank of England

"What I mean by an East of Suez moment," he explains, "is that the British government is facing a choice about the scale of the public sector into the future and, therefore, how much the state can do.

"If you talk to senior public servants privately," Mr Travers says, "many of them will say that the state has become too ambitious, that many parts of the state have found themselves trying to do things which go beyond their core expenditure remit."

Mr Travers believes the problem is that we want public services on a large European scale, but financed with American levels of taxation. That will not work.

So there will be big public-sector job losses. Some of the improvements in public services of the past decade will vanish.

Of course, after the long run of high spending there will be some fat in the system.

Dame Rachel Lomax is convinced that public spending needs to be cut.

Dame Rachel Lomax, a former Permanent Secretary and a former Deputy Governor of the Bank of England, points out that "the health service has been growing at over six per cent in real terms for the last eight years. You can't grow at six per cent and not waste quite a bit of money.

"So whatever kind of public spending cuts we do," she says, "they must be across the board so no area escapes scrutiny."

Ultimately we need a radical approach. We need to decide what can be done best by the state, and what can be left to the private sector.

This will need imagination, innovation and huge political will. Few politicians appear to understand the gravity of our situation. We have reached the end of the golden age of public spending. It was good while it lasted, and now we must pay the bill.

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You can hear Frances Cairncross' Analysis: Death to the Deficit on Radio 4 on Monday 9 November at 20:30 and again on Sunday 15 November at 21:30. You can also subscribe to the podcast here