The new coalition government has identified its key priority as reducing the size of the UK budget deficit and curtailing the spiralling borrowing requirements. However, there are concerns about how this should be done. Cutting the budget deficit too quickly will endanger any economic recovery that might be taking place, given that the UK economy is still very fragile, and might tip the economy back into recession. On the other hand there are strong pressures to cut public expenditure quickly and drastically, if only to appease the financial markets. .
Thus the dilemma is how best to cut public spending in a manner that satisfies the financial markets while 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 redirecting 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 UK economic activity. Expenditure on imported goods will not have such a positive effect and will also contribute towards the UK’s large balance of payments deficit. Thus the aim is to try to ensure that when decisions about public expenditure are being made, there is an ongoing 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 is lower. The trick is how this should be done, since any form of regulation or proscription would probably be declared illegal by one of the many supra-national bodies such as the European Union and the World Trade Organisation. However, it could also be the case that the UK is a 'soft touch' in relation to these matters. Hence, it is possibly a case of public service managers being encouraged to focus on UK goods and services and being provided with assurances that they will not be penalised for avoiding cheaper imports in preference for UK produced items.
- Labour focus – it is generally the case that the lower a person’s salary the larger is the proportion of income that it 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 – research undertaken by the author shows that many otherwise sound businesses will struggle to survive even after the recession truly ends. This might 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 redirecting 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 who 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 them. This just involves limited, targeted and time-bound support for key companies who might struggle.
- Pay cost focus - pay cuts in the public sector would have a substantial impact on the deficit but could protect public sector employment levels at a time of high unemployment and a lack of alternative jobs. The Spanish Government has just announced a 5% cut in public sector pay in 2010, which is not surprising given that unemployment in Spain is the highest in Europe. While the precise impact of a pay cut on public sector employment is unclear, a high-level analysis, by the author, of the latest data on public sector pay and employment suggests that compared with the level of job losses under a pay freeze, a 2% across the board reduction in public sector pay levels could save 110,000 public sector jobs. Clearly, pay increases would have the opposite effect.
The five suggestions mentioned above (and there might be others) would, of course, also 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 this case, the government had better get on with developing them quickly
Malcolm Prowle is professor of business performance at Nottingham Business School and a visiting professor at the Open University Business School. He can be contacted via his web page www.malcolmprowle.com
