Cable wrong to call for more spending

By Robert Hainault

David Cameron has yet again pledged to get the economy ‘back on track’ while ignoring Vince Cable’s calls to increase spending. He claims that to change tack now would plunge the economy ‘back into the abyss’. I think it’s probably time that we looked at some figures.

Eamonn Butler of the Adam Smith Institute pointed out in October of 2011 that despite general gnashing of teeth about cuts, the government had actually spent more than the previous year. The April-June quarter of 2011 was 1.3% higher than in the same quarter the year before when adjusted for inflation. In fact, despite Cameron pledging early on in his premiership to cut spending on beurocracy, Whitehall spending was 7.2% higher in August 2011 than it was a year earlier.

So, an inauspicious start.

Since then, not much has changed. In 2011 total government spending was £681 billion . Last year it  was about the same when adjusted for inflation. However, what is often overlooked is the interest on the new debt we have incurred. The government spent £90 billion more than it raised. It’s reaction was, as with all previous governments of recent years, to print more money, exacerbating inflation which is a further drain on our national economy and is, in effect, a stealth tax. A tax which leaves people with less money in their pocket, and thus less to spend in the economy.

In 2012 the government paid nearly £51 billion in interest on our national debt. That was twice what they spent on transport and even more than we spent on national defence.

And it’s not getting any better. At the current rate of ‘cuts’ our government will have managed to shrink its expenditure to £668 billion by the year 2014-15 (again, adjusted for inflation), a reduction of only 2.9%. Yet by 2014-15 the interest on our national debt will be £60 billion, and repayments will need to comprise 10% of the budget in order to keep the debt at the current level.

So not only will the national debt not have decreased by 2015, it will be considerably larger. Though the coalition have made some small progress in reducing the deficit, the debt is spiralling out of control, and with economic growth still on vacation there will be no more revenue in 2015 than there is now. In short, we will owe more and have less.

Unless, of course, we can see government spending drastically reduced between now and then, we will not only be unable to keep up with out debt repayments, but we will be unable to stop them growing larger and larger.

What we need, if we are to avert disaster, are sober and serious cuts to the public sector, which still makes up over half of our economy. It is a simple principle: public sector services cost money; private sector services generate money. Getting the economy ‘back on track’ requires only two things: that expenditure should go town and revenue should go up. In order to reduce expenditure public sector services need to be cut to allow the private sector to provide them. This, in turn, generates capital which means more taxable income for the government.

What we must not do is carry on as we are. Worse than that would be an increase government spending. The government is already spending too much on services and too little on debt management as it is. The more we spend on services, the less we have to pay off our debt without incurring yet more debt in order to do it. Though it might be unpopular, the only thing that will save our country from bankruptcy is to drop the secateurs and pick up a chainsaw.