There is virtually a consensus among all political parties that the size of the UK budget deficit (and the associated borrowing requirement of £178bn) is unsustainable and needs to be substantially reduced. While some of the deficit can be slimmed down through tax increases, the vast bulk will require substantial reductions in public spending.
However, the big political debate, and the difference between the two main parties, concerns how quickly the budget deficit should be reduced and in what areas the axe should fall. The government argues that cutting the budget deficit too quickly will endanger any economic recovery that might be taking place. This seems a serious point especially since last week’s economic statistics, which suggest the economy is still very fragile and cutting public expenditure too quickly may tip it back into recession.
On the other hand, there are strong pressures to cut spending quickly and drastically. There are concerns that if firm plans to reduce the budget deficit are not published soon (by whichever party wins the election) then the UK may lose its prestigious triple-A credit rating, meaning that either we would have trouble raising additional borrowing or the cost of that borrowing would rise sharply.
Thus, the dilemma is how best to cut public spending in a manner that satisfies the credit agencies and lenders, while at the same time minimising further damage to the real economy of the country. This is not easy to do but some particular themes might be considered:
- Infrastructure focus – there might be merit in making substantial cuts in expenditure on direct service delivery and re-directing, at least, some of the money saved into major infrastructure projects such as roads, buildings and transport. As well as improving the basic infrastructure of the country, this would provide a strong stimulus to the construction industry, which is a key driver of the whole economy.
- Internal focus - public expenditure that increases the demand for UK-produced goods and services will have a positive effect on domestic economic activity, while expenditure on imported goods will not have such a positive effect and will contribute towards our large balance of payments deficit. Thus, when decisions about public expenditure are made, there should be a focus on cutting imported items rather than UK-produced goods and services even if the cost of the UK goods is higher and value for money lower. The trick is how this should be done since any from of regulation or proscription would probably be declared illegal by supra-national bodies such as the European Union or the General Agreement on Tariffs and Trade. However, it could be the case that the UK is a ‘soft touch’ in relation to these matters. Hence, public service managers should be encouraged to focus on UK goods and services and be given assurances that they will not be penalised for avoiding cheaper imports in preference for home-produced items.
- Labour focus – it is generally the case that the lower a person’s salary the larger the proportion of income that is spent as opposed to being saved (marginal propensity to consume). Thus, reducing public expenditure through large-scale job losses among low-paid workers could have a serious impact on the economy as a consequence of there being a huge reduction in the purchasing power available for goods and services. On the other hand, achieving the same reductions in public expenditure through job losses of more highly paid workers would probably have a much smaller impact on the consumption of goods and services albeit with a significant reduction in savings
- Business support focus – my research shows that many otherwise sound businesses will struggle to survive even after the recession truly ends. This may be because of liquidity problems caused by post-recession over-trading or an inability to access investment funds needed to keep apace with international competitors. Thus, again, there might be merit in making substantial cuts in expenditure on direct service delivery and re-directing some of the money towards business support. The question is rightly asked as to why we were able to support the banks that caused their own downfall but we are reluctant to support key middle and small manufacturing companies that are key to economic recovery. It must be emphasised that this is not a return to the 1970s with government ‘picking winners’ and investing in those winners. This just involves limited, targeted and time-bound support for key companies that may struggle.
The four suggestions mentioned above would, of course, have significant political implications in their own right and would cause problems for politicians of any colour. However, it is probably also the case that the UK just does not have the sophisticated governmental mechanisms to put such policies into effect. In which case the next government had better get on with developing them quickly.
Malcolm Prowle is professor of business performance at Nottingham Business School
