Hamish McRae: Good, the old Treasury discipline is back – but there may still be bad calls on cuts

Economic View

The pace towards the comprehensive spending review, out on 20 October, steps up. Several of the ministers have agreed spending targets for their departments with the Treasury and have joined the so-called Star Chamber, the committee that bashes out the final agreement.

Those of you who did English medieval history may recall that this was the court of privy counsellors and judges, set up to bring to heel the most powerful nobles, the ones who could bribe or bully the lesser courts and thereby escape punishment for their crimes. There was no right of appeal, no witnesses, no jury, and the court's proceedings were kept secret.

The present Star Chamber does have a right of appeal, to the full Cabinet, and ministers do have the option of resigning instead of being done for treason. But it adds this further incentive for good behaviour: do a deal quickly and you get a say in what happens to your fellow ministers' departments.

This is not a new system at all, for it has been the textbook way in which the Treasury has controlled public spending in the UK. It is what happened not just under previous governments but under the early years of Labour in 1997-99, when public spending was tightly controlled. Then under Gordon Brown the Treasury expanded its role, controlling not just the overall amount a department had to spend but doling out money to meet the specific targets or objectives set by him. Instead of being overall controller of public finances, with the departments making the detailed decisions, the Treasury became the micro-manager of the whole caboodle. Paradoxically, this weakened control over public spending because the Treasury could not clobber a department for mis-spending when the Treasury itself had made the decisions and the department had just ticked the boxes.

Well, we know what happened under the previous government at a macro-level, for spending shot out of control. It used the excuse of the global recession and the banking crisis, but there was always going to be some sort of cyclical downturn and when that happened there would have had to be severe cuts in spending anyway. But there was also a failure at a managerial level, Not only did the Treasury take away from the departments the responsibility for how money was spent, it also made it impossible for there to be a debate between departments as to how funds should be allocated. Now the old system of imposing discipline over public spending has been re-established.

So we are not reinventing the wheel. That is good. But we may still end up with bad decisions.

At the moment there is a huge debate about the big numbers of the cuts. It is quite proper to have that debate. I happen to believe that the coalition has no option but to do pretty much what it is doing, for the dangers of not tackling the deficit swiftly are greater than the dangers of getting on with the job. The Irish experience is cited as showing the dangers of harsh public spending cuts but that seems to me a false analogy for a number of reasons.

One is that in addition to the running fiscal deficit, which is similar to that of the UK, Ireland has these huge debts of the banking system. Much of that money cannot be recovered, whereas the UK is roughly square on its bank investments and will probably exit at a profit. Another is that the Irish economy had not only a larger property bubble but also a much larger construction sector, which collapsed as demand fell. So the peak-to-trough decline was much greater. Third, Ireland is part of the eurozone and so, unlike the UK, has not been able to devalue, and the fall of sterling vis-à-vis the euro has made matters worse, for the UK is a huge export market for Ireland.

But there is one similarity. The business community in Ireland is as worried as the business community in the UK about the scale of indebtedness, as you can see from the graph.

This comes from some work by KPMG International, published in a paper called Paying the Bill. The firm polled 538 business leaders around the world, asking them about their attitudes towards national deficits. As you can see, concern in the UK and Ireland is towards the top end of the scale, with the US and most other European nations high too. Business in most of the emerging world (and in those paragons of fiscal probity, Switzerland and the Netherlands) is much less worried.

Asked what should be done about this, business unsurprisingly wanted cuts in public spending: globally 70 per cent wanted that. But if the job cannot be done by cuts in spending, business accepts that tax increases may be necessary. UK businesses seem to be less averse to increased taxation than elsewhere.

Asked what was the main reason for the economic recovery so far, there were big regional differences. In Asia, government stimulus was ranked number one, whereas in the US it was consumer spending and in Europe it was export demand. Indeed in Europe the additional government spending was not cited as one of the top three factors in establishing the recovery.

All this gives an interesting perspective on the UK's spending cuts. You might say that businesses always want lower spending, but a lot of them will be hit by it. Certainly they would be on the side of the coalition and that creates a problem for the Opposition: if it is ever to win power and be successful in government it will have to regain the trust of the business community.

The idea that it is better to cut spending than to raise tax is supported by another report from KPMG, this one with Oxford Economics: Meeting the Challenge: Strategies for Fiscal Sustainability. This concludes that deficit- recovery strategies based on radical spending cuts tend to be more successful than those centred on tax increases.

But if the coalition might feel it should take comfort from these findings – it knows, after all, that the recovery will be driven by the business community – it should be aware that when the detail of the cuts becomes clear there will be a lot of disappointment. You can agree with the Government's macro-economic policies but be distressed by the way these are applied.

More of us are drinking, but we're all drinking less. What? Oh, mine's a (nice) wine

Recession and the consequent squeeze on incomes seem to be changing our drinking habits, at least as far as wine is concerned. In a nutshell, more of us are drinking wine, but we are each drinking less of it.

For the past generation, the number of wine drinkers in the UK has been clocking upwards, but recently the numbers have soared. Twenty-eight million Britons are regular wine drinkers now, "regular" meaning having a drink at least once a month. That is a rise of 5 million since 2007, which is a huge shift. But, per head, we are averaging 9.5 glasses a month whereas three years ago it was 11 glasses.

If we are drinking less does that mean we are drinking better? That is not clear. According to research by Wine Intelligence, price is becoming more important in deciding what to drink. Some 33 per cent of wine drinkers say that they "don't mind what they buy so long as the price is right", compared to only 23 per cent a year ago. And more than seven in 10 go for promotional offers.

The boom-to-bust years have also seen us shift from champagne to prosecco. I am not sure whether this is a result of social change – people feeling it is inappropriate to be seen quaffing champagne when others are having a tough time – but it seems 15 per cent of the 28 million of us now drink prosecco, nearly double the proportion in 2007. It may just be that it is better value, or, put it this way, it is a lot nicer to drink good prosecco than poor champagne.

We will all have our own personal reactions to this and I suspect the idea that we should drink less but try to drink better will have crossed a lot of people's minds in recent months.

But the cheaper the wine, the higher the proportion of the money you pay that goes in tax. So, if you want to boost government revenues, drink lots of rubbish. That is surely as good a reason as any to go upmarket.