Early in the week, we will have the announcement on the Strategic Defense Review – a very important announcement in terms of the future safety of the realm and how we address the changing face of war and enemies in a world long past the cold war.
We have three further days of debate on the Parliamentary Voting System and Constituencies Bill.
And then on Wednesday, we will have the long awaited Statement on the Comprehensive Spending Review – the ‘cuts’ . We will then know in global terms the scale of the cuts in each department to see what part of the £83 billion will be born by each.
The push back argument from Labour – who left this mess and who would themselves have made cuts ‘deeper than Thatcher’ is the speed of the cuts – ie why not phase them over a longer period. My push back to that is as in my recent Ham & High column.
Imagine you have a friend who is a bit short of cash. They have explained to you that they need a loan to get them over a rough patch this week, but that they are cleaning up their act and in a few weeks will pay you back.
You might even lend them a bit of cash. If, however, a couple of weeks later you see them out partying and you find out they haven’t cleaned up their act then you may not feel so happy about this.
The situation with the government deficit is much like this. The government needs to borrow over £150,000,000,000 (that’s billion – but the noughts are compelling) between April 1 2010 and 31st March 2010 to cover the difference between tax income and expenditures on services and benefits. Those people who are lending the government money want to be certain that they will get the money that they lend back.
If the government says, as the coalition has done, that they are cleaning up their act and won’t need to borrow in a few years time then those with the readies are more willing to lend money. More importantly the lenders will lend the money at a lower interest rate.
In 2015 – when this parliament ends – government debt will be more than £1,000,000,000,000 (one Trillion pounds). The government is planning on cutting the amount borrowed each year, but isn’t planning to pay back any debt as getting borrowing down is seen as a good strategy and a matter of urgency.
This is important because the interest rate the UK is paying on 10 year debt is now 3.12%. Ireland is paying 5.82% and Greece is paying 11.37% (four times as much as the UK). Greek debt has a much higher interest rate because lenders are worried that Greece will not pay them back. Ireland, which is not in as bad a state as Greece, is still paying 2.7% more interest than the UK!.
These figures sound small as percentages, but on £1,000,000,000,000 of debt that would be £27,000,000,000 A YEAR. You can do an awful lot of good with £27 billion a year!
Labour are saying that the coalition are planning to reduce each year’s borrowings by too much. This means that under Labour’s plans we would have to pay interest on both more debt and also a higher interest rate. If they want to do this then they need to explain where they will get the extra £27,000,000,000 a year from. Would that be more cuts or more tax. £27bn is another 5% on VAT.
Tony Blair has admitted in his memoirs that Labour lost control of the public finances from 2005 onwards. He said “.. from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit.” (page 681-682)
Tony Blair as with Alistair Darling wanted Labour to have increased VAT. He said in his memoirs that Labour should have had “a gradual rise in VAT”. (page 680) Labour today have been beating the drum about VAT being a regressive tax, but Tony Blair claimed to be a progressive. In fact when you look at the size of household incomes VAT is a mildly progressive tax. A higher proportion of wealthy households income is taken in VAT than poorer households. The poorest households actually get a cost of living increase that more than covers the extra VAT they pay.
The reason why there is an argument about whether VAT is progressive or not is that there is a dispute as to whether you should compare households by the size of their budget (expenditure deciles) or how much declared income they have (income deciles). The coalition believes that looking at expenditure is a better comparison. Many households have undeclared income or are students living on their parents’ income, but in a separate home. Those figures skew the income anaylsis which is why the budget size is important.
Another point highlighted by Tony Blair in his memoirs is that “if you study the figures for government projections in the UK, by the end of 2014 public spending will still be 42% of GDP.” (p682)
The coalition government’s financial plans are rational. They involve less being cut in the long term than Labour although more is being cut in the short term. They are also progressive in that the costs for richer households are more than the poorer households.
The Unions (at their conference) appear to now be campaigning against any cuts at all – as if there is no penny spent unwisely anywhere in government and threatening strikes against short term cuts. They need to recognise that in doing so they are calling for greater cuts in the long term as are Labour – who won’t utter a dickybird as to where they would have cut.
We will, however, continue doing what is right and fair for the UK and we will concentrate on protecting the weaker in society.
Lynne Featherstone 
oh please do not patronise us with that inadequate and deeply misleading analogy.
Please, please, please. You are a minister in Her Britannic Majesty’s Government – the word is Defence – not Defense!
Great explaination Lynne! I’m glad to see that the coalition is taking a sensible position. I’m thankful that the libdems are in government as well. Assures me that fairness will be at the heart of government’s actions.
What an utterly incoherent piece. One small point though: you’re right to point out that Ireland is paying more on their debt than the UK. Shouldn’t you, in fairness, also point out that this is after they followed George Osborne’s prescription of fast, deep cuts? Which resulted in their budget deficit getting WORSE, unemployment getting WORSE, and their credit rating getting WORSE.
Your argument seems to be ‘Ireland is in a worse situation than us. We want to avoid becoming like Ireland. Therefore, we have to follow the same policies as Ireland.’
I am pleased that someone has at last made the point that if Labour wants to cut debt more slowly then that means they’ll clock up more debt and therefore have to end up cutting more in the end!
The government needs to borrow over £150,000,000,000 (that’s billion – but the noughts are compelling) between April 1 2010 and 31st March 2010…
Not sure it’s possible between those dates, Lynne… 🙂
Lynne
Your pre-review analysis seems to be one fifth schoolboy economics and four fifths slagging off the opposition. You are not winning either economically or politically, here.
If we are in the domain of economic policy, you need to back up these cuts with some intelligent analysis. Perhaps you could address these questions on your blog, as a starting point:
What causes the coalition to be confident that the private sector will pick up the slack in the economy and that we will not be driven into further recession?
Why does the coalition believe that cuts at this rapid rate will not cause structural damage to the economy in such a way as to prevent long-term growth?
Exactly what will happen to those who depend on the services which will be cut? Exactly what will happen to those who depend on the public sector wages and private sector wages that depend on public sector contracts where these are cut?
How will our pensions be affected?
What is the government doing to ensure that the causes of these problems (lax banking regulation, off-shore tax arrangements, falling competitiveness in an increasingly globalised world, increased exposure to volatile globalised capital markets, rising commodity pricing, too much dependence on services, unrealistic housing market, high inequality etc.) are addressed? Previous public spending policy is only one factor.
What is the realistic relative impact on the different strata of our society? What are the reasons for this and how will families be protected, if at all?
Why are cuts being made so deeply into public services, rather than increases made to the tax burden and what is the thinking behind universal taxes such as VAT are being increased rather than more progressive taxes such as income tax?
If you were to address people as adults and give straight answers to these questions, I think that you would find people much more likely to support the measures you are taking. I appreciate in Westminster, things are much more polarised and antagonistic but these cuts are going to make big differences to people and they need some adult leadership rather than what you used to call the ‘old politics’ of accusing your opponents of well poisoning.
For if we are in the domain of a new, adult, politics, it matters not a jot what the last government were going to do. It matters not a jot how stupid you think they were. You are in charge now. It matters what you are going to do and what you are going to be responsible for and put your name to. All the Labour-bashing sounds like you are trying to draw our attention away from what you are really doing. Tell us what it is and stand up for it. There is only so much blame you can put on a previous administration and you are using up your quota very quickly. The public are not daft and are going to lose patience with that very soon, and will not respect you for it. The Tories and Labour have been playing this game for a long time but the Lib Dems have always kept a cool head and have offered measured and well thought-through economic positions. You are throwing away a long-earned reputation for balance by getting involved in this slanging match.
I know I am always pointing out the same elephant in the same room on your blog, but it is so big and noisy an elephant that you are having to shout to avoid it drowning you out. The Tories are not your friends. They are not the friends of the people who voted for you. They are going to do serious harm to our country. You said so at the election. Now, you are forgetting that. The voters won’t.
Michael
RT @lfeatherstone: New post: Coming up this week http://tinyurl.com/3xyx3q8
The British, Irish and Greek Governments are not unique in having a defecit – it is a Europe-wide phenomenon. So, who exactly are you referring to Lynne when you say “Those people who are lending the government money want to be certain that they will get the money that they lend back.” I am not an economist and I would genuinely like to know …
On the other hand, when you say “You might even lend them a bit of cash. If, however, a couple of weeks later you see them out partying and you find out they haven’t cleaned up their act then you may not feel so happy about this” I think I know who it is that you have in mind – it’s the bankers isn’t it ? and you’re just too shy to say it …
So I would gather from your blog that you support taking the cap off of student tuition fees even though your party pledged the opposite. And, Ms Featherstone, please stop blaming Labour for everything – it sounds like a stuck record!
Lynne – you analogy about the economy and debt being akin to borrowing money from a friend is patronising, silly and misleading. Please don’t treat us like fools.
You seem to have fallen for Tory plans and ideology hook, line and sinker. Perhaps it’s because your Leader has always believed in a small state and the deficit is his chance to turn it into a reality. It was galling to hear Osborne at the week-end praising Danny Alexander to the rooftops and claiming the UK was on the ‘verge of bankruptcy’ (we weren’t and aren’t) and had the ‘biggest debt’ (we haven’t – serious as it is, we are less indebted than the US, France and Japan – and 2% more than Germany).
Cuts alone are not enough, unless your objective is broadly in line with Tebbit’s: ‘it isn’t working, if it isn’t hurting’. Michael’s first point here is key: in a fragile economy, with a broadly stagnant private sector, where exactly is the growth or the stimulus going to come from? Please could you explain (in a non-patronising way).
Ben
Lynne explaining in a non patronising way would require her to understand or care about the issues rather than write what she is told by some other people who affect to know.
She is totally clueless about her own brief and has demonstrated on so many occasions that she has the intellectual grasp of a redneck in Alabama that we cannot expect anything other than the pathetic facile nonsense we are now seeing . How can we expect her to say anything meaningful when she is so in thrall to her leader whose ideas will render his principle-less party as toast?
We are back in Thatcher terrain where the tories calculate that you can alienate one third as long as you deliver the two thirds. But some dummies who are aligned with them haven’t figured it out yet. Lynne of course has got a diploma so she will have got the point
Lynne’s problem is this:
What will she say Dave got wrong when she stands for election? Why would anyone ever believe anything she says again?
Personally I believe she will not stand at the next election.
Is this drivel really the best you can come up with? Presumably you think banks and building societies should turn away borrowers by telling them – “think of what you could spend that interest on”.
Pathetic.
I see you’re trotting out the ‘blame labour’ bits and pieces again.
I thought this was the ‘new bahoo-free-politics’? or have you forgotten this? – Along with your pre-election pledges and supoosed principles?
Why are you so confident that this parliament will end in 2015 when your party today has scrapped plans for a conference due to “security” fears?
Do you think that February’s conference will be going ahead now?