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Nick Wood: Cuts won’t take us to Wigan Pier but they will save us from bankruptcy

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BBC assistant political editor Norman Smith has unwittingly triggered quite an earthquake with his observation that Chancellor George Osborne risks taking Britain back to the 1930s with the public spending cuts he is planning in the 2015-2020 Parliament.

Smith, no leftie by BBC standards, was reporting the verdict from the Office of Budget Responsibility that the  cuts planned over the next five years, described as “colossal” by the Institute of Fiscal Studies, would reduce public spending as a share of national output to its lowest level for 80 years – hence Smith’s apocalyptic evocation of the soup kitchens, mass unemployment and hunger marches chronicled in George Orwell’s The Road to Wigan Pier.

Not surprisingly, the Wigan Pier analogy was angrily dismissed as “hyperbolic” by Osborne and Downing Street.

But it has fallen to the weekend press, notably The Sunday Times, to cast some light amid all the heat generated by the Corporation’s coverage.

The first point is that Britain’s national output is now six times bigger than it was in the 1930s. That also means that state spending on public services, welfare and much else besides is at least six times bigger in real terms than in Orwell’s day. There is no prospect that Osborne’s proposed cuts, if implemented, would presage a return to the appalling poverty that afflicted the northern industrial towns described in the book.

In fact, if real public spending per head were cut back as the Chancellor intends, it would return only to the levels of the early 2000s, when Gordon Brown and Tony Blair opened the floodgates and paved the way for the crisis in the public finances we still face after nearly 5 years of a Government ostensibly committed to balancing the nation’s books.

To eliminate the deficit by 2018/19, Osborne needs to reduce the ratio of public spending to GDP to around 36 per cent from its current 41 per cent and from its 2009/10 recession peak of over 45 per cent.

The second – and far more important point – is such a squeeze achievable?

Paul Johnson, director of the IFS, described such cuts as “colossal” and certainly the prospects of achieving them are problematic.

Osborne first promised to eliminate the deficit, still running at over £90 billion or more than 5 per cent of GDP, when he took office in 2010. The job was meant to be done by the end of this Parliament. But he has been blown badly off course by a slower than expected pickup in tax receipts, the turmoil in the eurozone and his own decision to narrow the tax base by taking millions of low paid workers out of tax with big increases in the personal allowance.

We now have the precarious situation where nearly 30 per cent of income tax is paid by the top one per cent of earners, up from 11 per cent in 1979. The rich may be different. They are also highly mobile in today’s world. How long before they decide that swingeing stamp duty rates on luxury properties, plus a mansion tax if Labour gains power, is cause enough to swap London for another bolthole?

Now we are expected to believe that the deficit will be wiped out by 2019 – four years later than originally planned. Only at that point can we expect to start paying down the national debt, now standing at £1.5 trillion and rising because the Government just keeps on borrowing.

Prudence and common sense would lead all the major parties to conduct a root and branch reform of our bloated modern State now spending around £750 billion of our money every year. But with Labour and the Liberal Democrats still wedded to the idea of all bountiful government in which “cuts” of any kind are to be met by much wailing and gnashing of teeth, only the Conservatives (and Ukip) appear to see the urgency of our predicament.

It is quite another matter whether the Tories have the stomach for the fight, especially in the face of the BBC and the vast army of pressure groups, quangos, charities and even businesses addicted to sky-high public spending. With health, education and overseas aid designated sacred cows and welfare formidably difficult to downsize, are this generation of touchy-feely Conservatives going to succeed where even Margaret Thatcher failed? And they have to win an election next May to make this more than a purely academic debate, which is far from likely on the current polling.

And for those who think that tax rises are a way of balancing the books, then it is worth reflecting on the fact, much trumpeted by Mark Littlewood, director of the Institute of Economic Affairs, that no British government has succeeded in lifting the tax burden above about 36-37 per cent of GDP.

There is a natural ceiling to public spending of about 35 per cent of national output.  All the rest is borrowing. We should recognise it and concentrate our energies on finding ways of constructing a smaller and more efficient state. One day, someone will have to do it.

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Nick Woodhttp://www.mippr.co.uk
Chief Executive of Media Intelligence Partners

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