The UK’s fiscal austerity/spending cuts plans will be difficult to implement successfully

After just writing an article on the United States I am now turning my attention to the UK which has a lot going on as we have news on public spending cuts and also a fair bit of news from our Monetary Policy Committee in terms of votes and speeches. In terms of the spending breakdown review due today I would like everyone to draw breath for a moment and think back to June 21st when we had an emergency budget.

Let us first remind ourselves of the scale of what is planned today from my update on the 22nd of June.

It was at the austere end of the spectrum. Net reductions in the deficit of £40 billion by 2014/15 which represents some 2.2% of Gross Domestic Product and predictions of a fiscal surplus in 2016 were at the upper end of expectations. Another way of putting the £40 billion is 89 Thiams.

Actually the quote as an aside reminds me that for now Mr.Thiam has got away with the expenses of his failed bid as the news about him has dec;lined to zero and has not included his sacking. However on the 21st of June I expressed concern about how equipped our new government would be to make its planned cuts.

However I expect spending cuts to be much harder to achieve than to suggest or to plan…….. We have a new inexperienced government which is going to try to make cuts of a size not attempted for a generation so I think caution should be the watchword.

I also pointed out the possibility of  Sir Humphrey Appleby style ruses being used, where you increase staff now to cut it later.

This is more the governments problem and I expect it to prove very difficult for them. There is a public facility that I use which I feel is over-manned and yet recently it has taken on more staff! So I would suspect Local Authorities will be difficult to deal with.#

And I had some thoughts on the difficulties of defence cuts.

Some subjects are simple for example the Royal Navy has more admirals than warships these days and I understand the army could field a whole battalion of under-used colonels (although to do quite what….), but these have persisted for years so I do not expect this process to be easy or painless.

Errors already made in the process

So when the breakdown figures are published today I feel that they should be read through a filter incorporating these issues  as the job is by no means easy.However there are two clear errors in the process and one goes back to the election debate in the spring of this year.

One curiosity is that all of our three main political parties are committed to increasing overseas aid by £4 billion a year by 2013.

If we have an area where we spend money most inefficiently then this area is a candidate, indeed there are arguments against aid per se. I do not mean say helping the victims of natural disasters I mean aid to help nations economically some of which goes to nations who are doing quite well such as Singapore.

A much bigger issue is excluding the National Health Service from the review. As we spend a vast amount on it there are likely to be many inefficiencies in its structure and perhaps it is too a candidate for most inefficient area. To my mind one cannot exclude an area which was 24% of central government spending last year or some £120 billion. This is a political points-scoring initiative which is poor economics to my mind.

The Strategic Defence Review.

My thoughts in this area are influenced by a book on this subject which I read a few years ago by Lewis Page. I do not agree with everything that he writes but there are some excellent ideas in it. These influence what I am about to write now and I would also point out that such a review was not easy and was not helped by the fact that the previous government had not had one since 1998 in spite of our involvement in two wars. Thinking of that again it does look somewhat shocking and shameful.

1. The Royal Air Force has had a victory in that its force of Tornado GR4 bombers to survive. Whilst they can do battlefield support they were designed for deep-strike duties against the Russians in what the first Gulf War proved would have been a suicidal plan. However we are scrapping our far more flexible Harrier force. Indeed our GR9 Harriers, operated by Navy and RAF squadrons, are primarily ground-attack planes which is exactly what is required in Afghanistan right now and in fact in virtually every war we have ever been in.

2. If that mistake was not already rather obvious it has been combined with the fact that our 2 new aircraft carriers will lack any fighter jets for some ten years. Whilst the Harriers are not pure fighter jets a previous version did rather well in the Falklands conflict if you recall….

3. We seem to be forever buying equipment and then ending up scrapping it on the grounds that we cannot afford it. Is there are more ridiculous way of operating? This is not the present governments fault (yet) but both types of previous government and indeed the Commons Select Committee has serious questions to answer here.

So just some thoughts and I have a further piece of news for you which I got from Mr.Page on the fourth of this month.

The Royal Navy’s new £1bn+ Type 45 destroyers, which have been in service for several years (the first is already on her second captain), have finally achieved a successful firing of their primary armament.

So to add to carriers without plans we have also had billion pound destroyers with no missiles for the past couple of years. Truly life is sometimes even stranger than fiction…More seriously it highlights the extremely serious problems at the Ministry of Defence and how fundamental change is required.


13 thoughts on “The UK’s fiscal austerity/spending cuts plans will be difficult to implement successfully

  1. The Ministry of Defence should be renamed The Ministry of Soft Touch and Ineptitude considering the consistent and continual overspend and late delivery associated with its buying. Maybe Mr Green can give them a few pointers or maybe not!

  2. The real terms cuts are cash terms increases over the four years. So there are assumptions about inflation and growth employed. On that basis there is immense scope for various outcomes four years down the road.

    Looking at the bullet points it seems that a fair amount of the burden will be felt lower down the income distribution. The only contrary indicator to this is the measure regarding child benefit.

    I’m struck by the contrast between welfare benefit cuts and the comments by Mervyn King reported today that there is a readiness to resume QE.

    Surely if there isn’t enough money to go around to protect the poorest in society then there can’t be enough money available for QE?

    Especially when you consider where QE is likely to end up: increased commodity and asset prices pushing up the cost of living, which will be felt particularly by those on lower incomes.

    We’re al in this together apparently.

  3. So the money we save from stopping families on benefit living in million pound houses will go straight to their relatives in some poor far away land to spend on houses? I dont understand the desire to protect the overseas budget whilst being happy to slash welfare for your own people.

    That is unless the overseas aid budget is to be used to fund our adventures in Afghanistan on the basis we are bringing peace (dont laugh) to the Afghans…

    As for Mervyn, he will find out the long run phillips curve is vertical. More QE simply means more inflation and no more growth or jobs…… its been tried before!

  4. What about the fiasco of the Nimrod MRA4 – the NAO described five days ago an appalling scenario where 21 original orders had been reduced to 9 and the unit costs had accordingly escalted by three times since the original decision was made. This was a £3.6bn order with BAE systems. How much will we pay for cancellation and who are the clowns responsible? The NAO Major Projects Reports 09/10 catalogues horrendous ineptidude in estimating original costs and highlights a policy where MoD deliberately slowed projects ‘in year’ increasing costs horrendously……..who are the clowns responsible for this and why arent there public protests, as its is taxpayer’s pockets that have been picked!

    • According to the book I read by Lewis page the MRA4 was ordered back in 1996 by Michael Portillo for a fixed price, no chuckling at the back please, of £2.2 billion for 21 planes or just over £100 million each. As the Soviet submarines these were designed to hunt were mostly rusting in port by then it was a dubious decision even then… If you really want to be depressed it was quoted as a example of the “smart procurement” programme.

      Later on he became a non-executive director of guess which company? Moral hazard writ large, and I say this with sadness because he made a very good series on travelling the UK by train using a Victorian guide book which I enjoyed.

      The Labour government which followed mostly had non-descripts or worse as Defence Ministers and so the mess went on in this case with nobody asking exactly which subs we were hunting or why we were using by then an airframe designed maybe 60 years ago. If you wrote a novel on this it might be rejected as too far fetched.

      If it was left to me I would make the previous defence ministers explain their actions…

  5. There are a number of theories regarding the real value of overseas aid.

    But before we get into that, let’s consider the Singapore question.
    My understanding is that DFID route money through a fund manager in Singapore, but it ends up in poorer countries eventually. Also, they fund some of our obligations as a former colonial power (pensions to former crown agents). I guess they were left standing when the music stopped.

    So, onto the main question. Why would a bankrupt/rich society value overseas aid?

    We (various different elements of our society) value overseas aid because:
    1. We genuinely believe in the betterment of humanity.
    2. We want to elevate everyone to participate in our global consumer economy.
    3. We want to achieve the perfect global free market.
    4. We want to avoid wars altogether.
    5. We want to avoid those wars that are not good for our economy.
    6. We want to convert the unbanked to banked so that we can exploit them.

    It’s easy to see why combining all these demographics, across the ruling elite, could lead to an increase in overseas aid, even in these troubled times.

    • Hi Paul
      I think you missed out that it gives politician’s an opportunity to grandstand and bask in good deeds. They love reflected glamour and tend to overlook the fact that others pay for it.

      Also it creates plenty of often well-paid jobs in international organisations for you guessed it our political class. Rather odd you might think when so few of them have any experience of anything other than politics that they suddenly become experts in this area.

      If a politician does enough in this area they might get an international or domestic award, maybe even a a Nobel prize.

  6. Just a thought, but given that public expenditure has not been cut it is pretty remarkable that maybe half a million jobs will be.

    More to the point, however, the hope that growth and/or inflation to get us out of this mess seems a bit forlorn. Spending is going up to just short of £750bn and income is currently just short of £500bn which suggests to my non-economist brain that income is going to have to rise by 50% odd by 2014 to balance the books.

    no bets on economic growth working this miracle. So what about inflation? To my eye inflation would only be able to pull this off if thre were not only price inflation but also wage inflation. Price inflation may result in high VAT (per unit) but if people don’t have more money to spend they will by fewer units: and income tax receipts can only rise if wages and employment rise.

    If this is right, then we look to be heading inevitably towards substantial increases in tax rate – will all the inherent risk of a downward spiral.

    • Hi Bonzo

      Apologies for the late reply. I do however have two reasons why the cuts will be difficult.

      1. We have a generation of politician’s whose whole career has been about making promises with other people’s money and spending more. The whole political system is biased in that direction and there are very few with any experience of having to cut back.
      2. Our politician’s are often weak in the face of opposition.
      3. The media are leading a campaign against them. I was watching the beginning of the BBC current affairs programme Newsnight this evening and it opened with the cuts and their effects on street-lighting in Nottingham on what was not a slow news day…

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