As developed countries across the world continue to bankrupt themselves with excessive borrowing and spending, few people in the public domain seem to offer any solutions. “Austerity!” shout one bunch, advocating lower public spending but higher taxes on the private sector. “Stimulus!” cry others, wishing for yet more public spending, funded by even higher borrowing. Both are wrong.
I’ve argued before that there’s another way. It involves slashing public spending by 40%, cutting out a lot of bureaucracy that drags on productivity, and big tax cuts. The idea is to rebalance countries away from the public sector parasite and towards the private sector host that we all ultimately rely on.
Increased borrowing would be needed in the early years, as tax rates are cut. But eventually economic growth would fill the gap. Then, with much lower public spending and annual budget surpluses (remember those?), the long process of paying down excessive debts could begin. Today’s adults would not be leaving their children and grandchildren in a state of bankruptcy.
I dread to think how much waste there is in a government bureaucracy, where empire building is the key to career development.
A target of cutting public spending by 40% sounds aggressive. It’s meant to. When I came up with it, I was making an educated guess but also a stretch target. I’ve seen the waste in a large global corporation first hand, where costs could easily have been cut 20%. I dread to think how much waste there is in a government bureaucracy, where empire building is the key to career development.
I genuinely believe major cutbacks of that scale are achievable in most developed countries’ budgets – or at least in that ballpark. It would take a few years, perhaps five. And it wouldn’t be popular. But in principle it could be done. And now I’ve found some evidence that backs up my earlier wild stab in the dark.
I don’t wish to pick on any is one country in particular…but what the hell, I’m going to. It was the United Kingdom’s bad luck that I came across some relevant data on its public spending this week.
Over the past decade, the land of sudden rain showers and afternoon tea has been on a bit of a spending spree (he says with plenty of English understatement). The warm glow of a property bubble (now mildly deflated, but still firmly afloat) and a security blanket of a credit boom hid the fact that government spending went through the roof after 2001.
The following chart shows UK government spending adjusted for inflation, at 2011/2012 prices. (Each year is called “2011/2012” or equivalent because the budget year starts in April, so there’s a calendar year overlap. It must be some kind of sarcastic British joke to do something so illogical.)
You can see straight away that spending went up from £444 billion in 2001/2002 to £694 billion in 2011/2012. That’s an increase of over 56%. And remember, these figures are adjusted for inflation.
As for all the socialists and unions and other assorted whingers moaning about the “savage cuts” and austerity, there’s not much evidence of it on this chart. Inflation adjusted spending is down just 2.12% from the heady 2010/2011 peak. Hardly enough to spark a revolution.
But, I hear you cry, the number of Brits has probably been growing too, hasn’t it? And you’d be half right. The number of people living in those damp and crowded isles has indeed risen. It went from 59 million in 2001 to 63.7 million at the end of 2012.
But the new mouths are not necessarily “British” – at least not yet. Between 2001 and 2008 the average annual population increase was 324,000. But 191,000 a year of those, or 59% of the increase, was from net immigration. Much of that immigration was from Eastern European countries such as Poland. Who’d have guessed that the Poles were such great cricket fans…
But I digress. The population was up 8% over the same period that real (inflation adjusted) government spending rose 56%.
Put another way, real public spending per person went up from £7,525 to £10,895. That’s a massive increase of 45%. As soon as the economy screeched to a halt in the aftermath of the 2008 banking crisis, it’s no wonder that the ratio of government debt to GDP has skyrocketed (see next chart).
That ratio is set to keep climbing for the foreseeable future. As a leading economic journalist at a “serious” British newspaper put it to me recently: “Between 2010 and 2015, on rosy growth assumptions, UK public sector debt will grow from around £750bn to £1,650bn. And they call that “austerity” !!!!”
Back to that spending ramp up. Cutting government spending per person back to 2001 levels of £7,525, in today’s money, would result in a reduction of 31%.
That sounds mighty close to my proposed target of 40%. And I don’t suppose things were super efficient back in 2001 when the developed world still looked quite rosy. I’d bet that other 9% cut could easily be achieved.
…United Kingdom provides just one example of the excessive government spending in developed countries…
The United Kingdom provides just one example of the excessive government spending in developed countries. But I bet you, dear OfWealthers, that we’d find a similar story in most of its developed market brethren.
There are no excuses. Excessive government spending can and should be slashed in these countries. Until then they are doomed to slow growth as the public spending leech sucks away the private life blood of the economy…and the debt continues to pile on.
That’s a big reason why I usually prefer to invest in emerging markets, where government spending and public debt levels are much lower…for now at least. I encourage you to do the same.
Toodlepip OfWealthers, as they might have said in Britain 50 years ago,