So should the Government borrow 8 per cent of GDP next year or 6.5 per cent? Or, much more probably, should it borrow 10 per cent of GDP or 8.5 per cent?
The charge levelled by David Cameron against Gordon Brown is that his borrowing plans are "extreme" and "reckless" and spending has to be cut more sharply than it would be under Labour's plans.
The reply from the Prime Minister is that it is sensible to give a fiscal boost to the economy this year and next, and then claw back the position as growth resumes in 2010 and beyond. As far as spending is concerned, growth will be restrained in the future but it would wrong to start cutting back now. This difference is being presented as "clear blue water" between the two parties.
Well, there is some water between the two parties but rather less than their rhetoric would lead us to believe. The truth is that both parties are bound to borrow on a scale that will be greater, relative to GDP, than at any stage since 1947 and both will be forced into savage cuts in public spending. It is just that the cuts would come rather earlier under the Tories than under Labour.
For both political parties are prisoners of some brutal fiscal numbers – or rather we as British citizens are the prisoners and we will be for a generation. Take that first pair above, the 8 per cent and the 6.5 per cent. The first is the deficit for 2009/10 as projected by the Treasury, the second what might have happened had it not introduced this £20bn fiscal package with the cut in VAT and so on. But actually the outcome is much more likely to be in the 8.5-10 per cent range, because the Treasury assumes an economic recovery beginning in the middle of next year.
That is of course possible but if it were to happen, the downturn would be far shorter than previous post-war recessions. If the recession follows the average post-war pattern, there will not be a solid recovery until the second half of 2010. That would mean an even larger deficit relative to GDP than that forecast by the Treasury – as indeed is privately accepted by senior officials.
So were there to be an election next spring and the Tories to get in, they would still find themselves borrowing upwards of 8 per cent of GDP in their first year of office, ie more than Labour says it plans to borrow now. The reason is that Labour's plans are based on an unrealistically optimistic assessment of the timing of the cycle.
And the years beyond? Well public spending will have to be curbed because the tax system simply does not bring in enough money to support a public sector of the size we now have. In the tax year that ended last April, Her Majesty's Revenue and Customs brought in £451bn. That sounds like a huge amount of money and it is. But this financial year revenues are projected to be lower at £447bn and the year after they are expected to slump to £427bn. That would be £70bn less in tax revenue than the Chancellor had expected in the Budget six months earlier. Tax to GDP would be below 34 per cent, the lowest since Labour got into office.
So we have this strange spectacle of a supposedly high-tax government being actually one that simply does not seem able to raise the money. Go beyond to 2013/14 and revenues are expected to recover – they are supposed to reach more than £700bn then. But we don't know for sure that that will happen. What we do know is that on present, and arguably over-optimistic, plans we will double the national debt, something that has never happened before in peacetime.
This is something the next government will have to confront head on. It is not politics; it is mathematics. The top level of tax take in the UK seems to be around 36 per cent of GDP. Labour has never managed to nudge above that level for more than a year. Again and again it overestimated tax revenue even though growth came in on target. You can add all sorts of new taxes but the money simply does not seem to come in. The Institute for Fiscal Studies reckons that the proposed 45 per cent top tax rate will bring in no additional revenue at all.
I am afraid the underlying fiscal position will get worse irrespective of whatever happens during this economic cycle. There is the cyclical issue of to what extent it is safe or effective to try to borrow more to nudge the economy through the worst of the downturn. That on the surface is the subject of the present clash between the two parties. I realise that this is important politically but in economic terms it is not at all clear whether increasing borrowing really gives the boost it is expected to. It ought to help a bit but the evidence is mixed.
The even greater problem is not the cyclical deficit but the structural one: the fact that we cannot raise enough tax to support a public sector of the size we have now got. The problem will get worse because demand on the public purse will rise as pensions and interest rate payments grow. And once our workforce starts to shrink, as has started to happen in Germany, revenues will almost inevitably start to shrink too. You can see why Angela Merkel is so resistant to trying to borrow more to nudge Germany through the downturn.
To tackle the structural problem one or more of three things has to happen. One is to find some way of increasing the tax take so that the Revenue collects more than 36 per cent of GDP. A second is to shrink the public sector, maybe in part by forcing more efficiency on it but by having real cuts too. And a third is to find ways of charging people directly for public sector services. This is a vital political debate that will go on long beyond the next election. It will go on for a generation, for the bills we are now running up will have to be paid by our children and indeed their children too. Of course what happens in the next two years matters but we really should not be arguing about the odd £20bn of extra borrowing during this time.
Or rather, sure, let's argue about that, but let's use what is, I am afraid, a fiscal catastrophe to trigger a measured and honest debate about what kind of public sector we want and are willing to pay for. And that debate has to acknowledge the interests of the next generation, not just this rather greedy one.Reuse content