New PM must use Greece as cover to cut the deficit now

I went on Moneybox Live on Saturday morning (you can listen to the show here). The conversation was, as one would have expected, all about the impact of the hung parliament on markets. Just how big a deal is it? I went in under the impression that not only is it a whoppingly big deal, but that everyone understood that.

Not so. The other two guests seemed to think that as long as sometime this week there was a “clear plan” for cutting the deficit, all would be well. They didn’t even think said plan needed to show the cuts biting now. No, as long as said plan showed things getting going next year, that would be enough.

I don’t buy this. Not for a second.

Let’s look, just once more, at the basic facts. The UK has a declared national debt of £750bn. That’s ludicrously large. But right now the point is not even the size of the debt. It is the size it will become. Politicians never mention the debt. Instead they talk endlessly of cutting the deficit. But the deficit is just the amount we add to our debt every year: unless we cut it to zero, we increase our national debt every year.

And how. As Liam Halligan points out in The Sunday Telegraph, even if somebody somehow were able to “halve the deficit” over the next four years (Gordon Brown’s plan) our national debt would still skyrocket – to £1,500bn. That is, as Halligan puts it, a debt run up that is “uniquely fast” among the world’s major ecomomies.

So “let no politician tell you that the UK isn’t Portugal and isn’t Greece.” We are accumulating debt faster than anyone else and we are doing it against a background of semi-recession and a weak currency. It really is about as nasty as it can be.
But there are two things that could help our politicians sort all this stuff out. The hung parliament and Greece. Why? Because they provide cover.

A Conservative-Liberal coalition can use Greece as cover to rip up both their manifestos. The last few weeks, they can say, have added urgency to everything and shown what happens if you don’t cut spending drastically before the market makes you.

Then they can use the hung parliament as cover for disposing of each other’s scared cows (“I didn’t want to cut spending on the NHS, but Nick said I had to…” “I didn’t want to give up the tax cuts but Dave said I had to…”).

We’ve written a lot in MoneyWeek about how spending can be cut – perhaps Geddes Axe style or Canadian style. So there is really no shortage of examples for Clegg and Cameron – both of whom are reasonable men who do so far appear to have national interest at heart – to follow.

They’d better get on with it. The new deal in Europe has given the FTSE a super reprieve this morning. But if we don’t have a government prepared and able to get down to work pretty soon, that won’t last. The markets are watching us.

  • DST

    For once Merryn, I can’t find a point to disagree with you on.

    It just amazes me how few people seem to realise how much debt we’re in, and exactly what it means for our future.

  • Michael Lewis

    We’re headed back to the 70’s with a Lib-Lab coalition by the looks of things. Time to head to the exit, phone up the recruitment consultant and -try- (there will be lots of people with the same idea) and get the hell out of town… you think people in the UK want to pay the bills? I bet Mervyn is greasing up the wheels of his printing press as I type.

  • Merryn

    Note that the Lib Dems appear to be getting it. Earlier today David Laws, a member of their negotiating team said that “deficit reduction and a plan to bring down the deficit as soon as possible must be at the heart of any agreement” the party made. The crisis in Europe gave them an opportunity to make a U turn and they have, it seems, taken it. It’s a start…

  • Crash Gordon

    There is so much waste now in the system that if I were the new administration coming in (hopefully nothing to do with the New Labour apparatchicks and their “communitarian” agenda) Then I really wouldnt know where on Earth to start first.

    I will happily show any interested new Ministers of State around literally millions and billions of public assets laid waste by our incumbent leaders who also have presided over inefficient and wasteful processes designed to increase bureaucracy, provide comfy sinecure roles for “mates” and cronies.

    Honestly i think we can slash that deficit without any trouble at all providing Dave C gets his finger out gets this show on the road – Hurry up theres work to do and i cant wait to see it happen!

  • Mark F

    Excellent article Merryn. I dearly hope the new Government are avid readers of MoneyWeek.

  • Samantha

    Whilst your article has logic behind it Merryn I question how logical our politicians are and how much thought they have given to reducing the deficit. Having looked into this a little I went to the notayesmanseconomics web blog to see his analysis and was concerned to see this.

    “It does not require many mathematical skills to realise that what has so far been announced makes the deficit worse and not better. This is hardly an inspiring start. I hope that there is plenty of work going on in the background pinning down some spending cuts as we need them in the tens of billions or markets will start looking at places like Spain and comparing their forecast deficit path with ours.”

    So our new governments first move is to make the situation worse…