Saturday, 26 March 2011

On the protests in London

So, today we're supposed to see upwards of 300,000 people march the streets of London, protesting public sector cuts.

The truth is that public sector spending as part of GDP has increased from 35% of GDP to 53% today, and the balance sheet of the UK as a result has turned from a surplus into a significant deficit.

I did a little digging, because I would have expected the only Western countries to have comparable public sector spending would be Scandinavian, with their generous welfare models, and this is what I found:

Sweden at 56.6% of GDP, Denmark at 51.7%, and Finland at 48.6% reflects very high public spending, compared to 46.9% in Germany, 39.3% in Canada, and 33.5% in Ireland.[2
First thing which strikes me is that Danish public sector spending is below that of the UK, which genuinely surprised me. But the thing about both Denmark as well as Sweden, is that both have tax rates significantly above those of the UK, which essentially means for the UK to be able to support the current system, either taxes need to increase to Scandinavian levels, or cuts will be required. There has historically been a third option - growth - but considering the economic climate of today, I think it's safe to say we can leave this option out, also for the simple reason that the only time where a comparable debt situation has been resolved through growth, was in England, at the onset of the industrial revolution.

Anyway, the 2011-2012 budget at a glance:

The gap is (rough figures) £710bn spending, unmatched by £590bn of intakes.

The protesters in London will obviously want tax increases "on the wealthy". The thing is that the deficit - £122bn - is 75% of the amount of tax intakes. In other words, income taxes would need to increase by 75% to cancel out the deficit. There simply is no chance of anyone actually staying behind in the UK if that were to pass. Alternatively, every type of tax would need a (710/590)=20% increase. This would mean the 20% VAT would increase to 24%, council taxes on average increase from (estimate) £1,200 to £1,440, and naturally income taxes would rise equivalently as well - not to forget the additional fuel duties, which I'm sure the protesters would be understanding of.

I'm sure you by now have realized just how unrealistic it is to expect the problem to be solved entirely by raising taxes, and hence public sector spending remaining where it is. Cuts are required.

The vast amount of spending goes on 3 items; welfare (£200bn), NHS (£126bn), and education (£89bn). Since calls for these to be ring fenced are voluminous in scale, if these were to be wholly preserved, we would need to almost completely eliminate defense, public order, social services, and housing & environment in order to balance the budget.

And all of this against a backdrop of deteriorating demographics, which ensures a continuously growing outlay on pensions and health services for a growing retiree population, and less people in the workforce to provide the tax base for this to happen.


  1. The govt of the day could stop capital moving out of the country, as in the 60's and then put taxes up ??

  2. That would almost certainly cut foreign investment, and lead to (even more) serious inflation issues down the road.