The Impact Of Public Spending Cuts...

Not many people have started to think much yet about the kind of impact the inevitable and huge cuts in public spending are going to have. In my Money Week column this week, I've been looking at the effect it will have on the regions, but it will go much wider than that. Here's a taster of the piece.....

If there is one phrase that David Cameron would like people to associate him with it is probably ‘one nation conservative’. Ever since Benjamin Disraeli coined the term in his novel ‘Sybil, or The Two Nations’ in 1845, it has stood for a brand of compassionate, inclusive Conservatism that Cameron would like his government to embrace.
The trouble is, he is likely to be savagely disappointed.
The now almost certain 2010-2014 Tory administration is going to see Britain become two nations again, probably more savagely than even under Mrs Thatcher, and certainly much more so than under Disraeli.
So far Wales, Northern Ireland and the North-East have been largely protected from the recession. The juggernaut of public spending that had fuelled their recent prosperity is still rolling. But whilst the prosperous South of the country may well bounce back from the recession reasonably quickly, the regions are about to be tipped into a brutal economic whirlwind. The result will be a vicious social and political battle that will mark much of the first term of the next Tory government.
Under twelve years of a Labour government, regions that were once a by-word for depression and unemployment have prospered. Old industrial centres such as Tyneside, Belfast and South Wales have been re-invigorated. Smart new apartment buildings have sprouted along the banks of gloomy old canals. Sparkling new shopping malls have sprung up on derelict factory sites. Stern, redbrick warehouses and mills are now trendy bistros and coffee bars. To an extent that hadn’t been true since the 1950s, the UK became, economically at least, one nation again: the South might have been a bit richer, but the gap wasn’t widening.
There were some solid underpinnings to that. In Northern Ireland, for example, the troubles came to an end, and peace is always a lot better for economic growth than war. In the North-East and Wales, the savage if necessary process of de-industrialisation that started in the early 1980s had come to an end. The ‘destruction’ bit of capitalism’s constant ‘creative destruction’ had ended, and the ‘creative’ bit had started.
And yet, it was also in the most part a mirage. The prosperity of the regions was about as solid as a wobbly jelly. Whilst there was some genuine economic development, it was mainly a tidal wave of government spending that lifted them up.
Over the last few years, many parts of the UK have become as totally dependent on the state as any of the old Soviet satellites before the Berlin Wall came down 20 years ago. According to calculations by the Centre for Economic and Business Research, public spending now accounts for 67.9% of the Northern Irish economy, 67.3% of the Welsh economy, and 61.6% of the economy of the North-East (Scotland, despite its image as a subsidy economy, comes in at a slightly more modest 57%). By contrast, in the South-East, the state accounts for only 38% of the economy, and in London only 39%. Those are vast differences – the state is almost twice as dominant in Wales and Northern Ireland as it is in London and the South-East. With the recession, it is only going to get worse. The Treasury’s own figures show the state accounting for almost 70% of GDP in Wales and Northern Ireland by 2010-2011. For a comparison, in the same year, state spending will only account for 60% of Cuba’s output. On any meaningful definition, these have become fully socialised economies.
That was fine so long as the money was there to pay for it. But the public spending taps are about to be turned off. The IMF warned last month that Britain had the worst budget deficit in the developed world, and that much of the shortfall was structural. Regardless of whether it pulls out of recession – and with the current policies it probably won’t – there will have to be huge cuts in public spending. That is going to hit hardest in those areas where the state spends the most.
London and the South-East may well be able to bounce back relatively quickly from the recession. Free market economies are always flexible. The south of the country has benefited from a huge depreciation of the pound, stimulating new export industries, as well as massive injection of cash from the Bank of England. By next year, it could well be growing at a reasonable clip again. If Gordon Brown’s catastrophic decision to lift the top rate of tax to 50% is reversed, there won’t be much to hold it back.
But the regions are going to fare much worse. So far, they have been protected from the worst of the recession. Public spending is still growing at a steady rate. The government payroll is still expanding, wages are still going up, and generous pensions and perks are still protected.
But from 2010, that all starts to go into reverse. Spending will start falling. And that is going to hit the areas that depend on the state very hard.
Over the last decade, the state has expanded so fast in those areas, there is virtually no private sector left to speak off. There aren’t any industries that workers can switch into. Nor are there any clusters of entrepreneurial innovation. The government has employed so many people, and paid them so much better than the private sector, that it has crowded out all other activity.
In the 1980s, Northern Ireland, Wales and the North-East suffered hardest from the collapse of big, old-fashioned industry. In the next decade, they will suffer most from the collapse of big, old-fashioned government. The results are not going to be pretty. You don’t need to know much about economics to realise that when an entity that accounts for 70% of GDP cuts back, it brings everything down with it. House prices will plummet. Shops will be shuttered up. Unemployment will soar. What few private businesses remain will struggle.
At some point, the regions will develop new industries, just as they did in the nineteenth century. But in the meantime, Britain is going to be two nations again – one fast recovering and growing more prosperous while the other is stuck in a deep, permanent slump.