The UK's new Chancellor, George Osborne, is committed to finding £6 billion of cuts by the this weekend. That sounds like a lot, but given the scale of the challenge facing the country I think this target is a tiny sop to the markets that showed such concern on Friday (and which failed to recover today).
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
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