Whenever I reflect on the economic mess we’re all in, I am reminded of that old Irish story about the travellers who’d lost their way and stopped to ask a local for directions to Ballybunion. Drawing deep on his pipe, the old fellow leaning over his gate finally responded: “Well if I was going to Ballybunion, sure I wouldn’t be starting off from here.”
From Washington to London (and Edinburgh) and right across the eurozone, political leaders know where they want to get to. Back to growth and prosperity. After all, that’s what keeps the voters happy. Isn’t it? But starting from where we all are – with sky-high unemployment and flatlining economies, with yawning budget deficits and mountainous national debts, and synchronised austerity – the route to that promised land is as difficult to discern as the road to that wee corner of County Kerry.
The latest to make a stab at it is France, now led by President Francois Hollande and his government of the left. Its 2013 budget, released yesterday, is the toughest in 30 years. A total of €30 billion in spending cuts and tax rises is designed to kickstart growth and put the public finances “back on the rails” by 2015.
The €20bn of tax hikes fall mainly on big business and the rich, with the biggest assault on wealth rather than income. The new 75 per cent marginal tax rate on earned incomes above €1m a year, only affects up to 3,000 people and is forecast to raise just €210m. But even in socialist France, where there has been no growth at all for the past three quarters and unemployment is now above three million, the emphasis is on austerity.
National debt, will still hit 91.3 per cent of GDP next year. We will discover, in due course, whether Hollande’s brand of redistributist austerity revives the economy. Or will it put French industry at even more of a competitive disadvantage? And persuade more of its better-off citizens to take their wealth to more benign tax environments? Boris Johnston will be in Paris any day now to sign some of them up.
At least France, having lost its Standard & Poor’s AAA credit rating in January, can still borrow at very low interest rates. Spain, which enjoyed a budget surplus and low public debt before the great crash, can’t. Its government has just announced a fifth round of budget cuts and tax rises in just nine months, paving the path for a EU bail-out for its troubled banks.
This time the spending squeeze is 8.9 per cent of the budget, or some €40bn. And a lot of the pain will continue to rain down on ordinary citizens, including an additional tax on their lottery tickets. It is also stirring separatist sentiment in Catalonia, which accounts for a fifth of the Spanish economy. But Catalonia’s regional government is so deep in debt itself it needs an early bail-out from Madrid to keep paying its employees’ salaries.
And then there’s Greece. And Italy. If this is what Joyce McMillan, in this space yesterday, meant by “boss-class miserabilism”, then it is everywhere. And, far from being orchestrated by those who “care nothing for the lives of ordinary citizens”, it is the common currency of politicians of varying stripes who all claim they are only in that trade at all to make voters’ lives better.
The trouble is all democratically-elected politicians, in thrall to the electoral cycle, struggle to rise to the demands of a crisis as big as this. Back in 2010, the Westminster coalition thought it had the route cracked. Address the deficit, restrain the growth of state spending and a private sector resurgence would put the UK economy back on track in good time for the next UK elections, in 2015. How wrong they were. The choices thrashed out in those Rose Garden days three summers ago have actually made things much worse.
If you want a detailed account of how it all went wrong, I recommend The Blunt Axe, a recent special report by Brian Reading for Lombard Street Research. It’s a searing indictment of the June budget and October spending review that followed the inconclusive general election and coalition agreement between David Cameron’s Tories and Nick Clegg’s Lib Dems. “The operation was successful but the patient died,” says Reading.
He shows how no attempt was made to measure the impact of any of the proposed cuts on future growth levels. Rather capital investment was “castrated”. Nor was there any analysis of how each department’s spending contributed directly to the public goods each exists to deliver.
The newly created Office for Budget Responsibility said it expected the package to cost 66,000 public sector jobs in the first two years. In fact it cost 372,000 jobs.
Come December, George Osborne will have to abandon one of his fiscal mandates, to get UK net debt as a share of GDP falling by 2015-16. With continued austerity well into the next parliament, the argument between the partners for the rest of this parliament will be what and who should bear the brunt. Spending or taxes. The masses or the rich. Of course part of Joyce’s boss class, greedy bankers, were deeply culpable in creating the conditions that led to the crisis that triggered this botched political response. I know I am not alone in being astonished that only two – Fred Goodwin and Peter Cummings – have been publicly named and shamed. Let’s at least hope those who ha-ha-ha’d their way through the Libor scandal get their come-uppance.
But government, even government here in Scotland, cannot be absolved from any responsibility. The devolved administration in Edinburgh has a substantial get-out card. It’s all London’s fault, it keeps telling us. When we get all the economic levers in our hands, things will be different. But even an independent Scotland will have to shoulder its share of the UK’s ongoing debt mountain. And produce more balanced budgets if it wants to stay in the EU and in a sterling monetary union.
It will have to do that while redeeming its pledge to slash corporate tax rates to more competitive levels. But at the same time fund the level of welfare spending Scotland currently enjoys, whether it is the 6 per cent higher per head than the UK average, postulated on Monday, by Iain Duncan Smith, or the 8 per cent higher suggested in these pages on Wednesday, by former Scottish Office chief economist Gavin McCrone.
Any Scottish government, whether devolved or independent, will be faced with some very hard choices over the next five years or more. Universal benefits that were easy to sign off in the years of plenty will come under increasing scrutiny. So they should. So too should other apparent priorities like some hugely generous golden goodbyes given to senior civil servants opting for redundancy over the past couple of years.
£88m has been used in this way in just two years, with the biggest individual payments topping £250,000. That’s in addition to their copper-bottomed pensions. Since a number of them glide seamlessly into new, high-paid positions elsewhere in the public sector or the City, it’s another non-growth-producing expenditure we could all do without.
They wouldn’t stand for it in Ballybunion.