The cuts: 1 sum and 2 questions

I’m going to leave analysis of the details of the cuts to others – for now, at any rate – and concentrate on a much more basic issue.

On the morning of the 20th October it was announced that government borrowing in the month of September was £16.2bn.  To be clear, that’s £16.2bn of new money borrowed in a single month.

On the afternoon of the 20th October the Chancellor of the Exchequer announced a raft of cuts intended to save a total of £81bn over 4 years.  To be clear, by the end of the financial year 2014/15, the government will have spent £81bn less over the entire period than it otherwise would have done.

So here’s the sum:

£81bn ÷ £16.2bn = 5

This means total savings over the next 4 years are equivalent to 5 months’ worth of borrowing.  To put it another way, thanks to all the government’s cuts we’ll be able to borrow nothing for 5 of the next 48 months – but only if we borrow £16.2bn for each of the remaining 43.

Now here’s the first question:

Is it credible that cuts equivalent to only 5 months’ borrowing will have a significant impact on the total borrowed over a period of 48 months?

I would suggest that the only plausible answer to this question is no.  Clearly, if nothing else alters over the period, the government’s cuts, draconian though they are, are wholly inadequate to the task of cutting the deficit.

It follows that, if the deficit is to be eliminated by the end of the period, some other factor must be responsible for the bulk of that improvement.  That other factor can only be an improving economy, which will simultaneously decrease government spending (fewer people claiming unemployment benefit) and increase government income (increasing tax revenues).  In other words, the major reason the government will be able to balance its income and expenditure will not be the programme of cuts, but changes resulting naturally from the end of the recession.

So here’s the second question:

If cuts are not crucial for the government to balance its books, why are they going ahead with them regardless?

This question is harder to answer than the first one.

It could be that those poor, benighted souls who work in the City of London are uniquely – and surprisingly – unaware of the cyclical nature of economics, and have to be placated with the severed head of the welfare state in a basket before they’ll believe that things will get better.

It could be that the government is in love with the idea of being ‘tough’ and ‘firm’, and isn’t really too bothered about the specifics.

It could be that this government of Etonians, by Etonians, for Etonians (to misquote Abraham Lincoln) knows that public services are mainly relied on by the non-U, and so can be safely cut without affecting people like them.

It could be that the Conservatives want a slash and burn raid on the public sector for ideological reasons, and the Liberal Democrats are too stupid, or venal, or cowardly to stop them.

My best guess?  It’s a combination of all four.

Still, there’re some things I know for sure.  25 years on, the news is full of cuts, Thatcher’s making headlines, and ‘King’s Cross’ is relevant again:

The man at the back of the queue was sent

To feel the smack of firm government.

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3 Responses to The cuts: 1 sum and 2 questions

  1. Katherine says:

    Having met many economists and bankers this year while doing my degree, I can say with some confidence that no, they do not understand the cyclical nature of the economy inasmuch as every time the economy expands, they forget that it will probably contract again eventually; every boom leads to proclamations that the cycle of boom and bust has been conquered. Freshwater economists (i.e. Friedman followers and such) also believe the demand curve is in the long run a straight line, which means that recessions are, in a sense, not really real. Saltwater economists tend to be Keynesians and recognise that there is a role for government to stimulate aggregate demand in recession – the Tories are definitely not Keynesians.

  2. cb says:

    I think we should put the economics to one side and just admit the reality of the political agenda driving this. We’ve seen it coming but this government does not have a clear mandate to destroy the country in this way.

  3. aethelreadtheunread says:

    Thanks for the comments. :o)

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