Comment: Public spending moment of truth is here

George Osborne has been consistently wrong on budget deficit and tax revenue estimates. Picture: Reuters

George Osborne has been consistently wrong on budget deficit and tax revenue estimates. Picture: Reuters

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THERE’S much for Scottish business and the Holyrood administration to chew on in the wake of last week’s Autumn Statement. From the widened stamp duty disparity between Scotland and England to pressure for a review of the non-domestic rates system similar to that announced for England and timid changes to the North Sea tax regime, it made for uncomfortable reading.

But the biggest cause for discomfort were the implied cuts in government spending – especially sensitive in Scotland given the relatively greater share of government spending in our GDP.

It was, in a prime ministerial slip of the tongue last Wednesday, a day for “maso-sadism” at Westminster. But if the Autumn Statement was intended to stimulate the feelgood factor, there was a whiplash sting in the tail by Thursday.

Such is the scale of implied spending cuts that we are heading, according to the Institute for Fiscal Studies (IFS), towards a situation where “the role and shape of the state will have changed beyond recognition.”

Cut to gloom-laden coverage on the BBC of “colossal cuts ahead”, a return to the Depression era of the 1930s and a reference to the Autumn Statement as the “Book of Doom”. Osborne’s on-air riposte was that this was all “hyperbolic”.

Few would dare rush to the defence of the Chancellor. Osborne has been consistently wrong on his budget deficit forecast, debt projections and tax revenue estimates. And his projection of a disappearing deficit in four to five years ahead had an eerie familiarity: a Gordon Brown budget was never complete until he had rattled off figures of a vanishing deficit in future years. It never happened.

But this litany of errors doesn’t necessarily make the BBC/IFS right on the Draconian, politically impossible scale of future spending reductions – in particular, the comparison of government spending to GDP ratios and the 1930s is glib and misleading.

Today our GDP is far larger. Comparing it to the 1930s is to argue that a melon has the same dimensions as an orange. Our household income and general living standards have been transformed almost beyond recognition.

What is unarguable is that a moment of truth has finally arrived, not just on the scale of debt but on the significant contribution that has been made over the years by the Dutch auction politics of “anything you can spend I can spend more”.

And we have to confront another truth that has also been building for years: that as demand rises relentlessly for NHS and welfare services, and with it the cost, there are unavoidable implications for other government spending departments when a clamp is placed on further borrowing and debt.

The figures don’t lie. We are maxed out. Borrowing from April to October this year was £64.1 billion – an increase of £3.7bn compared with the same period last year. Public sector net debt is set to spiral above £1.5 trillion. And while annual debt interest will not grow as fast as previously expected, it will still top £64bn each year by 2019-20.

The credibility of the deficit reduction programme rests almost entirely on the willingness and ability of the next government to make cuts in public spending even bigger than those in this parliament. The state will have to get smaller, and government consumption will see bigger reductions.

Significant cuts in departmental spending have already been made but, as the Centre for Policy Studies (CPS) points out, opinion polls consistently show that people have not seen a particular deterioration in the quality of public services. Previous predictions of heavy net job losses in 2010 have been proven inaccurate given the rapid rise in private sector employment.

The IFS may describe the required cuts in the next parliament as “colossal” but that does not mean they are impossible. We know large amounts have been wasted on failed IT systems, projects that don’t deliver and a welfare budget that has drawn migrants in problematic numbers. A determined and creative approach to government spending which examines how services should be delivered is crucial.

We could, of course, raise taxes. Many believe this to be a preferable option. But this would risk lower economic growth and higher unemployment.

Much of the increase in economic growth projected in the Autumn Statement is predicated on sustained growth in investment and an improvement in the trade balance. How this is achieved is, as the CPS points out, unclear “and if growth from 2016 onwards has already been downgraded then future downgrades in medium-term growth rates are also possible”.

For Scotland, all this presents a particularly formidable challenge given the strong political support for the protection and extension of public services. Scots businesses are likely to pick up on Osborne’s pledge of a review of business rates in England to demand a similar review here. And while there are small helpful reliefs on national insurance and lower costs of hiring young apprentices, John Swinney will need more than a piecemeal approach.

Scotland’s response to the Autumn Statement needs to be more nuanced than simply “no cuts here”.

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