The 'c' word

Tweet In response to a comment on a recent post, I said that it disturbs me how quickly the political debate has moved from whether cuts in public expenditure are necessary to a simplistic demand that each party should identify its own list of cuts. In a specifically Welsh context, it suggests that we have already given up on two major battles, and I don't understand why people expect us simply to roll over like that without a fight.

The first battle is to ensure that cuts are made to major UK projects before turning to the services on which Welsh households depend. Trident, the new Royal Navy supercarriers, and ID cards are all examples which spring immediately to mind.

The second is the battle for a fair funding formula, under which Wales would get back part of the millions that we currently lose under the discredited Barnett formula.

But, looking more fundamentally than that, are massive cuts in public expenditure really as inevitable as the media and the London parties seem to be assuming? And if they're not, how has one particular view on the 'right' size for public expenditure come to dominate debate so rapidly?

There is, of course, no debate that there is currently a huge excess of expenditure over income in the public sector, and that that cannot go on indefinitely. But it is a big leap from agreeing that to agreeing that we need large cuts, or that we need them now. In reality, there are at least three separate elements to the budget shortfall, and in deciding how to achieve a balanced budget, we need to look at all of these in context.

The first is that there is a cyclical element. At a time of recession, government expenditure on benefits – particularly those such as JSA – rises, whilst at the same time tax revenues – income tax, company taxes – fall. Provided that there is an equivalent surplus during the 'good' parts of the cycle, this part of the deficit is not necessarily a problem, and should not, of itself, lead to a need to make cuts. It is entirely sensible to be borrowing at one point of the cycle and repaying at another.

The second is that there is a large 'one-off' element, in the shape of the billions used to bail out the banks after the collapse of the financial sector. How much of a problem this is depends really on what assumptions we make about how much of it we get back. Since much of it was used to purchase equity, then there is at least a chance that, at some stage, the government will be able to recover all or part of it by selling that equity if the share price should recover.

There's a political question, of course, as to whether the government should deliberately decide to retain all or part of its stake in some or all banks. The bottom line is that, in setting budgets and deciding on cuts, there is a judgement call to be made on the extent to which this money is gone forever and the extent to which it is a blip, albeit a very large one, to be covered by borrowing; and without being clear on that judgement call, using this expenditure to justify cuts is a bit of political sleight of hand.

And the third is the extent to which Government spending, even in the good times, has exceeded the income from taxation. This is where the real debate should be concentrating, but I have to admit that at present the size of this element is about as clear as mud to me, because it's confused by political point-scoring.

The Tories, of course, look simply at the grand total and claim that Labour have massively overspent; but that is a political rather than an economic judgement. It suits their agenda to portray Labour as profligate, and to quote the largest credible figure for the debt. Politically, they are pretty much hard-wired to see all public expenditure as being evil, even if in some cases it's a necessary evil. Labour on the other hand claim that they have 'invested' in improved public services, and spent twelve years trying to make up for the underspending of the Tory years.

I have more sympathy with the Labour viewpoint; but it tells me nothing about the affordability of that investment. They seem now to be admitting themselves that they have spent more than they could really afford based on taxation income; but my conclusion is that the gap is rather less than the Tories are claiming. Both parties have a vested interest in presenting the figures in ways that suit them; but that isn't necessarily conducive to constructive debate.

And, looking at the other side of the balance sheet, there is still a question of whether and to what extent any resultant deficit should be made up by public expenditure cuts or by increased taxation. Superficially, the evidence shows that people will support cutting public expenditure rather than increasing taxes at a general level; but the support doesn't necessarily turn out the same way if certain specific cuts are compared with certain specific tax increases.

What does seem increasingly certain is that whether the next government is led by Brown or Cameron, the block allocation to the National Assembly will be cut, and the One Wales government will be expected to reduce its expenditure to match. The size of that cut will vary according to the colour of the government, and until we know which changes to English public expenditure will have a Barnett consequential, any figure will include a significant element of guesswork.

It highlights, yet again, the problem with the way in which Wales is funded and the need for a proper parliament with fiscal powers, where we can take responsibility for the income side of the balance sheet as well as the expenditure side.

Against that background, demands that I, or Plaid, start spelling out a detailed programme of cuts is simply asking us to work to the Tory agenda. Our proper role at this stage is to defend the interests of Wales, not to spell out how we would implement the London parties' programmes.

Update: Hat tip to Change of Personnel for this link. I am not alone in challenging why so many are falling into the trap of accepting the Tory line.