Only Credible Plan for Early Cuts Can Redeem Us

LAST YEAR, when the government bailed out the banks, many people worried about how this was funded. And a lot of them asked me to explain where the money came from.

Today, with the crisis receding and the economy inching, however slowly, back into growth, not as many people seem worried about it. But that worries me.

Because the answer to the question about how we funded the bail-out to the banks is that the government got a lot of that money by borrowing it.

And that means that, far from being "out of sight, out of mind", the consequences of the crisis are still with us; the government owes lenders money equivalent to the value of nearly two-thirds of the whole of the UK's Gross Domestic Product (GDP).

If you add to that the money that the government will have to pay out in pensions, Private Finance Initiative contracts, and other things (such as the small matter of Northern Rock liabilities), then the figure rises even further, to 103.5 per cent of the total GDP.

We can be sure that figure will have gone up since it was calculated by the Centre for Policy Studies in late 2008, but we need to put it into context. If it applied to an individual, that level of burden is the equivalent of someone trying to pay a debt by adding up everything they earn in a year, and finding out that it still doesn't cover it.

 It seems to me that if an individual were in that situation, the first thing any financial adviser would tell them to do is to spend less. That kind of sound advice to an individual should also apply to the state and that is why it is worrying to see that the Conservatives are no longer planning swinging cuts, but rather appear happy to delay them.

In other words, there is no longer much difference between the two main parties on cuts. The choice has narrowed and, because of this, I think it is time we remade the case for getting stuck into cutting the government debt sooner rather than later.

First, we can only borrow because international lenders have the confidence to lend to us — the UK has a triple-A rating in international credit markets and that is important. But the more we drag our feet in paying back, the less confident the markets will be.

If our rating as a country is downgraded, it would mean higher interest rates, which in turn will mean each of us will pay more each month for our mortgages and have less each month to spend. And that in turn will mean less money going into the economy to help Britain get back on its feet.

Those higher interest rates also mean that the total figure in national debt that the government owes would go up, so the entire debt will take even longer to repay.

The government department which sells the bonds that finance our debt, a relatively modest office in the City of London, is not used to selling such gargantuan quantities. It is already working flat out; it sold more bonds this financial year than it did in each of its first seven years combined.

But the main reason we need to make deep cuts fast is because the confidence of those who are lending to Britain will probably be dented when they realise how out-of-control the UK's public finances are.

Here are some facts. One in five Britons now works for the state, and half of all the expenditure in the entire UK economy will soon be spent by the government. That is not right.

And too much spending goes to waste. An investigation by one newspaper recently found that the total figure wasted on failed IT projects alone was £26 billion — "more than half of the budget for Britain's schools last year".

This should not be a party political issue. It was not the Conservative Party that called the projects "fundamentally flawed" and blamed ministers for "stupendous incompetence," it was parliament's own spending watchdog. This was the result of shoddy negotiating on the part of successive ministers without any business experience.

But the results have been devastating: it has created a tier of workers whose jobs are dependent on contracts they have signed with the government. There are even some companies in this position, and IT consultants are just the start — it also applies to a range of service delivery companies.

The net result of this spending is that headline figures on how many people the government employs do not begin to reflect the total number of jobs that are in fact dependent on taxpayers' money.

All the main political parties agree on the need for real sustained economic growth. Well, government contracts like these cannot provide it. The next government needs to make immediate cuts to this waste.

It should follow that with cuts to the prisons budget – young offenders' institutions cost the taxpayer £300 a night, more than the Park Lane Hilton – and then get stuck into the bloated National Health Service budget: more than one in 20 people in Britain works for the NHS. Support for this approach is growing. Earlier this week, the Institute of Directors released a report spelling out the urgent need for a credible fiscal plan which would reduce public spending to 35 per cent of GDP by 2021 and freeze it in real terms over the next decade.

It explicitly rejected the idea that acting fast would be dangerous, arguing that, on the contrary, "the announcement of a credible fiscal plan could enhance investor confidence and act as a spur to growth via lower gilt and corporate bond yields".

At the same time, the Confederation of British Industry has released a report which sings the same tune: we need a plan for cuts, and fast. It is clear that "delivering a detailed and credible plan for balancing the books by 2015–16, two years earlier than planned, is the key to addressing concerns about the UK's public finances and AAA debt rating."

It seems that while the economists are floundering in disagreement about what is best for Britain, business leaders are speaking relatively coherently: and they are telling this government to cut deep and fast.

It is important that Britain shows those lenders to whom it owes money that it is making an effort. It may not be popular, but a slow plan to trim around the edges won't cut the mustard.

Azeem Ibrahim is a research scholar at the Kennedy School of Government at Harvard University and a board member at the Institute for Social Policy and Understanding.