Malcolm Blair Robinson
May 18, 2010 By Malcolm Blair-Robinson

Deficit Cuts: What To Look For

As the fur begins to fly among the politicians when figures at last become public, readers of this Blog may find some thoughts useful to help them decide, who, if any, are telling the truth.

In an ideal economy the revenues from taxation balance or exceed all the government’s expenditure. There should be a small surplus at the low end of midway in the economic cycle, a surplus at the top end of midway and a big surplus when the economy booms. This enables reserves to be built up so that in the downturn there are savings to call upon.

These reserves should then be used to meet the shortfall arising in day to day running costs of functions and services as tax revenues drop and benefit costs rise, while economic activity falls. At this point the government can start to borrow, not to pay daily running costs which should be met out of reserves, but to stimulate new economic activity by investing in new infrastructure projects like transport, schools, hospitals and so on. This  stimulates economic activity, boosts revenues and drives regeneration and renewal. Eventually budget surpluses return,borrowing is paid off and a modernised country presses forward to new prosperity. This is classic Keynesian economics.

If the government has increased spending on services and reduced taxation to pay for them in the good times so that it has built up no reserves, or worse if it has overspent in those good times and borrowed to bridge the gap, when the bad times come, it has to borrow for everything. It has to borrow not just for projects to benefit the economy but for the daily bills to keep it working. The borrowing gets bigger and bigger and the cost of the interest due on the accumulated loans takes a bigger and bigger proportion of tax revenue which eventually snuffs out any recovery bought with wholly borrowed money. It is this set of economic sins of which Labour stands accused. As every traditional housewife knows you cannot borrow your way out of debt, any more than you can dry your washing in the rain.

How to deal with this crisis is what the argument will be about. Certain points are clear. The revenue from taxes must be sufficient to pay for all expenditure of running the country, its benefits and its services. This means increasing taxes and cutting services in some combination about which there will be big arguments. There also has to be a surplus to pay the interest on the accumulated debt and to reduce it significantly by paying it off.

To do this without creating a second recession will be difficult. Questions will need to be asked about value, need and benefit to the economy as a whole. It would help, too, to consider whether the welfare state should be universally free to all, or whether the better off should enjoy subsidy, but not a free run in health and education and tax breaks for children.

Apart from dentistry where the charges are quite steep, the only charge in the NHS is for prescriptions. That may not be sustainable. The only charge for education up to age 18 is for school meals. That may not be sustainable either. As for paying winter fuel allowance to people, many of them retired civil servants on fat pensions, or child benefits to everyone including those with £1million bonuses in their pockets; this nonsense must stop right now. 

The Welfare State means helping everyone in need. It does not mean throwing borrowed money at the entire population regardless.

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