Wednesday, 2 February 2011

Is Britain's debt plan sustainable?

While the world's eyes are - totally justifiably - on the ongoing crisis in Egypt, worrying cracks have continued to emerge in the UK government's deficit reduction strategy.

There's no doubt that Britian's budget deficit had to come down, and fairly sharply - though it's also no secret to readers of this blog that your correspondent's preference would have been for the brakes to have been applied with a lot more care, leaving a lot less rubber on the road (let's leave that overstrained metaphor there).

One of the reasons for this, I always thought, was that reducing a budget deficit of nearly 11 per cent of GDP was always going to be extremely tricky and politically - not to mention ethically - problematical within a single Parliament.

And turning back on your plans is worse than never making them in the first place. It would bring the whole structure and credibility of UK macro-economic management into question.

That's what the Institute for Fiscal Studies is warning about today. Although they are in general behind the Chancellor's attempts to reduce the deficit, even they have grave concerns about the practicality of the whole programme. Here's a corker in this respect from page two of the IFS press release:
The current government’s planned cuts to public spending are far greater than those attempted in the 1990s, and achieving these more ambitious spending cuts will be more difficult. In some parts of the public sector – such as in the Home Office and the Ministry of Justice – a combination of the depth of the spending cuts and low labour turnover means that a downsizing of the workforce on the scale implied by the Spending Review will be difficult to achieve cost-effectively on the proposed timescale. Overall, with such large downside risks to the public finances, having alternative plans to hand could prove useful.
Er - I told you so. I hate to say that - well, actually, I don't - but there you have it.

This idea of a 'Plan B' is, however, absolutely what Chancellor and Prime Minister have refused to countenance, leaving us lashed to the mast of a project that just might now work. It's an extremely worrying prospect. And it need not be like this - all the Government would have to do, perhaps in the coming spring or autumn, would be to say 'ah, inflation and interest rates look a bit higher than thought, the world situation is more uncertain, we'll go a bit easier on you'. That'd make them look statesmanlike - as well as right.

I'd stand by for exactly that outcome if I were you. Which would at least show that Whitehall and Westminster do bow to reality - sometimes.

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