REDUCTION IN PUBLIC EXPENDITURES

Reduction in Public Expenditures

Reduction in Public Expenditures

Introduction

This has been the year in which 'cuts' became the mainstay of political rhetoric. The leaders of both main Opposition parties, David Cameron for the Conservatives and Nick Clegg for the Liberal Democrats, made the reduction of Britain's national debt the centrepiece of their party conference speeches in the autumn of 2009. Mr Clegg even referred to the need for 'savage' reductions in public spending. Even Gordon Brown, who for most of his time as Chancellor of the Exchequer and Prime Minister made the distinction between 'Labour investment' and 'Conservative cuts' the defining choice in British politics, accepted that there would have to be reductions in public expenditure. The purpose of this paper is twofold. First, it will attempt to place this urgent question of Britain's national debt and current public sector borrowing in a historical context. It will ask: is the stock of UK state debt now very high as against what it has been in the past? And, secondly: is it actually excessive by comparison with that of other nations? The paper will then move on to examine the record of various governments in cutting public spending since 1945. It will discuss the 'lessons' policy-makers should draw from the control of public borrowing in that period, before concluding with a short discussion of those techniques that are most likely to lead to longstanding reductions in the current public sector deficit.

Theory, history and British public sector debt

The first point to note about public sector debt is that it is quite unlike household borrowing. The ability of governments to borrow is much greater than that of private citizens, and they may do so much more cheaply than individuals. Since they represent nearly the entirety of economic activity within their borders, they are unlikely to be completely unable to pay - unlike the international bankers and City of London financiers who have dominated economic policy since the 1980s. The British economist John Maynard Keynes, newly fashionable since the implosion of world financial markets began in 2007, understood this well. He would undoubtedly have approved of the recent policy of 'quantitative easing', by which the Bank of England has added to the money stock by buying up government debt. As he put it in his General Theory in 1936: Unemployment develops... because people want the moon; men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.

Similar reasoning explains how successive governments could run a consistent, though small, current deficit in the post-1945 period, while still paying down their debt very rapidly. The long time-spans involved, given that public debt was often issued on thirty- or forty-year terms, allowed even a small amount of inflation to eat ...