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Merryn's Blog

What are we paying the government to do?

The way to get Britain growing again isn't to cut interest rates or print money - it's to shrink the size of the state. But no one in government seems willing to even consider the idea.

Click here. Are you enraged? If you aren't, you should be. The Ministry of Defence is looking for a 'Diversity Officer'. Said officer will be part time, and be paid £42,000 pro rata. "Cuts," I can hear you snorting, "What cuts?"

You snort for good reason. In this week's magazine in the editor's letter I note that there isn't much going on in the way of cuts.

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In what adds up to an astonishing abdication of leadership, there seems to be a cross-party consensus that the almost unbelievable rise in public spending over the last decade (by over 80% to 46% of GDP) is something we can't and shouldn't reverse.

There is much talk of "the cuts", but beyond the endless posturing of Parliament and the media we haven't yet seen any fall in public spending at all. Quite the opposite. Include financial sector interventions, and UK government debt is now running at 147.6% of GDP, says Evercore Pan-Asset. Take them out and we are at around 62%.

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It is also worth noting that this is not something the government has plans to reduce. Its only plan is to reduce real spending very slightly (4% in real terms by 2015/16) with the idea of slowing the rate at which the national debt is rising (the deficit) rather than cutting the national debt itself.

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On coalition plans, public spending will still be almost 123% higher in 2015/16 than in 1999/2000. Exclude financial interventions, and public debt will be 69% of GDP in 2015/16 (that rises to 84% if calculated the way Europe's Maastricht Treaty does it). And if the UK doesn't grow as the government assumes it will (which it won't), those numbers will be even higher.

So what should we do? Tullett Prebon says we should first think about how much debt the UK can actually afford. It probably isn't 69% of GDP. It certainly isn't 84%. Gilt yields might be low now, but they won't stay low forever.

Then we need to ask why the state needs to spend 46% of GDP this year. "What are the essentials that the government must somehow spend money on today but managed fine without spending money on ten years ago?"

Then we need to think about growth itself. The state has been willing to consider all sorts of unconventional policies to bring back growth interest rates at their lowest level ever and the printing of enormous sums of money via QE being the obvious ones.

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But at no point has it been prepared to consider the completely obvious one: cutting spending and then hugely cutting taxes with the benefits going to working people and smaller companies - something that would stimulate consumer activity and push resources away from non-growth sectors and back to 'growth capable' sectors.

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We know that most of the economy is now effectively locked out of growth. I've written about this here but the key is that those sectors financed by the state (health, education and public admin) can't grow; that the sectors financed mostly by debt (property, construction, financial services) can't grow; and that under the circumstances, retail is unlikely to grow. Between them, those sectors make up 70% of our GDP.

We also know that very low interest rates and QE have so far not done much to change this (and it is hard to see how they can).

All this means that we have to get busy transferring resources from the state to the small, private businesses that can grow; and from the state to the people who would consume if they could low and middle wage earners.

Tullett Prebon has three suggestions for how to do this. The first is similar to that suggested by Luke Johnson in the magazine a few weeks ago cut the tax burden on fast-growing small companies sharply. The second is to slash VAT to a much lower level. And the third is to hugely reduce taxation on those earning up to £37,000 or so.

Tullett Prebon tells us it will be fleshing all this out in its next report. But for now the real question has to be the cuts. Clearly we need real cuts. Where should they be? What are we paying for now that we weren't paying for ten years ago? And do we really need to keep doing so? Answers below please.

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