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Monday, 27 April 2009

So how low do we have to go?

Let's assume government expenditure was cut so that borrowing could be reduced to 3% of GDP. Well if we say GDP is around £1.4 trillion, that means net borrowing of £42 billion, so that means expenditure cuts of £131 billion, but that reduces GDP even more and also means that the government receives about £50 billion in tax and other revenues. Anyway with a bit of tweaking, assuming that all exchequer revenues are proportional to GDP, we have an outcome that looks like this: So let's call that a 28% cut in government spending and a 14% cut in GDP. This is a back of the envelope calculation, but should be in the right ballpark and closer than any forecast that you'll ever get out of this government.


ric davis said...

Doesn't that disregard increased social security costs because we'll be paying social support costs for the wastage from public sector right sizing?

Allowing for that, all other areas of Public Sector expenditure need to shrink by > 30%.

Alex said...

You are right to point out that there may be more claimants, but it doesn't change the 28% overall cost reduction that is required, merely that it has to cover more, so as you say other areas may have to shrink.

In practice many of the unemployed will alreasy be on some form of benefits and the difference between working family tax credits and unemployment benefit may not nbe that much.

A recession does not increase the numbers of long term disabled, lng term unemployed and pensioners who make up most of the welfare payments. Many unemployed will be ineligible for benefits - e.g. formerly self-employed with working partner. The greater impact comes from the loss of tax receipts already factored in.

harmonyfuture said...

Hi Alex, it's good to see these things in black and white, many many thanks for the information Government find it so difficult to provide.