Saturday, 4 July 2009

Labour Cuts, Tory Cuts, does it matter?

“This kind of red ink implies both spending cuts and tax hikes that could make the 1980s look like a teddy bear’s picnic.”
Niall Ferguson, British Historian, Part of comments made recently about a possible run on Sterling in the near future

As recent as two years ago politicians were avoiding talk of government spending cuts, seeing it as a poisoned chalice that should be avoided at all costs. Issues such as the environment, raising the Inheritance tax due to housing 'wealth' were the hot topics of discussion for flippant middle England. No party was seriously discussing the government fiscal deficits that were evident to people who noticed. No one was talking about off book debts, or even dared mention NHS cuts. Now all politicians want to talk about is cuts, the unsustainability of the previous spending policies. Again David Cameron has twigged onto this when it has clearly become an issue rather than stick his head out when he became the leader of the Conservative party, that would have gained him credibility. The public are still being misinformed, indeed the true severity of the situation has not been realised, with people truly believing that the deficit will be dealt with in due course and everything will run its course. It is the authors opinion that this is wishful thinking and that it is already too late to avoid the real crisis that will emerge over the coming years. Government deficits between 12.5 and 15 percent, is verging on banana republic status. Japan only obtained double digit deficits 7-8 years after its credit crunch, not months after the event such as in Ireland the US and the UK. How will the years to come look and how do we get out of this mess?

The state of California recently declared an economic state of emergency, promises to pay are being issued, positions and working hours slashed as the state is no longer solvent, in other words a lot of short term pain. They do not have their own printing press so have accountability over their spending plans. This is how it should be. Limits on government spending, the monopoly of money taken away from them, letting the market determine if they are creditworthy. It remains to be seen if they stay the course or if the US government does decide to offer some assistance.

So talks of UK Government cuts in the media still seem to be under the illusion that 'efficiency savings' or purging the Quangocrats will do the job, but much tougher decisions will have to be taken, cuts that also take time to implement especially when we are talking about vital services such as health and education for example.

If we first look at the NHS, it will be a huge burden on society as time passes, a burden the government will not be able to afford. The NHS was set up after the nation returned from war, turning their back on war leader Churchill in favour of Clement Attlee's more collective polices. Free health care for all and so on. Fast forward 60 years plus, and technology has come a long way. Medical science has ever more sophisticated tools and operations, able to diagnose all sorts of illnesses. With people living longer, more and more of us use this service as average ages have climbed. The NHS was not designed for these leaps in technology and associated costs, but no politician has had the will to reform the institution substantially. Myths are told by the left that Tory underinvestment killed the NHS during the Thatcher years but spending rose more in real terms than during the 1960's or 1970's - the perceived decline was from the above factors. This has followed on during Labour years, and despite Labour pouring money into this money pit, the result is still a shambles of a system, with many people on average wages shunning it for private health care.

If the government wishes to balance its budget at some point this will be one area they will not be able to neglect. So how bad could it be? With resources already so stretched how much more can it take? I honestly believe that people in the future will continue to look at the private sector for alternatives as the NHS crumbles and the quality of service continues to decline. It is a myth that government can simply just cut money in a matter on months from an institution like this, as the NHS still provides the majority with their basic health care needs. If cuts are too drastic people will suffer from more time off work, lowering working productivity. There needs to be further encouragement for people on reasonable incomes to move into private sector solutions. If people are penalised from opting out of the NHS then there is less incentive to get private health insurance. Its an opinion I hold myself, why pay income taxes, National Insurance etc, if opting out of the NHS is taxed as a benefit despite you doing the government a favour.

Education is a similar story. Cuts are also inevitable in this area. The government has promised the world to everyone without thinking through market needs or the costs involved. Higher education is a classic example, with quotas of students set at 50% and percentages that persecute against private schools rather than ability. Despite the waste producing graduates who end up in jobs that need no qualifications, the government pursues with this so they can claim they are improving peoples lives. It seems more like appeasing the middle class to ensure all their children go through 'higher' education. The reason why the student loan was introduced was due to these reasons as numbers began to swell during the nineties. Society just couldn't afford or had the need to send such numbers into higher intellectual pursuits, hence they imposed debts on people that wished to participate (by the way its not a real debt as so many misinterpret or whine about, its a tax as the obligation to pay is based on earnings not interest payments, in effect an extra income tax, something I do not begrudge paying). Higher education isn't a right as it has become, but a privilege where society invests in this segment of the population in order to have a skilled workforce.

Its the same story in compulsory education. Why will they move the age up to 18 from 16? Why was it at 16 in the first place? Many children are forced to go through the system for the sake of government rules, despite the fact the school won't put them in for exams as it would 'blemish' their position in the results table. Years ago they would have found a job that interested them early on. Commentators argue that we are now in the 'knowledge' economy and we need to invest in education, but its all nonsense. There are plenty of low skilled service sector jobs that require basic skills that are obtained earlier in life, but nothing taxing. Just sit back and think of all the jobs that people perform that require basic skills. The majority of jobs require no academic training, just work experience and common sense. By keeping kids in the dilapidated, overstretched state schools, it further expands a new underclass, a class of society who used to go into the workforce at 14 such as my Grandad, but now become despondent and angry, trapped in an education system that neglects them and destroys their self esteem. I think education is vitally important, in which it doesn't necessarily need a practical requirement. For years I have enjoyed reading history, but I haven't asked for society to pay for it. There is nothing stopping people pursuing intellectual activities in their own time.

Pensions will be a hot topic going forward. Why we rely on the government to provide us with a pension I will never know as the government never saves for them, just placing further future liabilities on their balance sheet. When pensions were introduced at an age of 70 one hundred years ago, you were lucky to collect one. Now it is deemed a young death if you don't reach retirement age. Real pensions are peoples saving which eventually buys an annuity. With increased capital in society this can be further invested, by financial intermediaries to build businesses and so on. Instead we have a system where pensions have become a drain on society, rather than a driver of prosperity, as the government have messed up yet again. The current public sector pensions can not be paid, they are too large and the government is already in a terrible fiscal position. They can't easily be cut either as people have made no alternative plans. Companies are already making cuts, the correct approach sooner rather than leaving it longer and allowing deficits to get too large or not giving people time to plan for alternatives like the government has done.

In the years to come interest payments are going to increase further, diverting spending away from real aspects of the economy such as education or health. The sooner the government begins the cuts the better the long term results. There is going to be hardship, but the cuts can be strategically carried forward like the post suggests. Cut University numbers, give people incentives to opt out of the NHS instead of taxing it as a benefit, some honesty regarding pension figures by bringing the numbers to the balance sheet and helping youngsters realise their potential by giving them choices. This article is not a critique of public sector workers, such as teachers, nurses or doctors as many offer a great deal to society but it is a criticism of the system they work under. Cuts are inevitable. It just doesn't have to be as painful as what I fear it will be as politicians don't like to abandon the status quo.

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