There'll be no room for shilly-shallying—the cuts will have to be commensurate with the scale of the problem. And just in case anyone's forgotten that scale, a BOM correspondent in Singapore has recently sent the following chart produced by Citi Global Markets to advise their clients.
It shows the amount of fiscal tightening needed by each of the major economies in order to get government debt back to the maximum safe sustainable level relative to national income (the maximum level reckoned by the IMF and others to be 60%):
As we can see, with the single exception of Japan, we in the UK have a bigger mountain to climb than anyone else. According to Citi's analysis we need to tighten fiscal policy by a whopping 12% of GDP. In plain English, that means the next government needs to cut spending or increase taxes by £180bn pa (in today's money). Which in round numbers is the equivalent of:
- £7000 pa extra taxes/ lower spending per household;
- increase in the basic rate of income tax to 65p; or
- increase in the standard rate of VAT to 57%; or
- 25% off total public spending;
So there is no room for hesitation. And no time either. The longer we leave it the worse it's going to get, as mounting debt interest compounds the problem.
And for the those who say it would be better to call in the IMF and blame them, we invite you to watch the TV coverage of the Greek riots. The IMF is no easy option, and the IMF will give us little leeway to set our own priorities.
Not to mention, of course, that such an action would screw confidence in the British economy for decades to come.
Something needs to be done, and quickly.