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Sunday, 20 September 2009

Balls' cuts in perspective

Ed Balls says he thinks he can cut £2bn from the Education budget. What does that do for us? Nothing that you would notice. What would it take to balance the budget? I only ask because it is pointless thinking we can foist our costs onto the next generation if there are nearly 1 million 16-24 year olds out of work and this year's university graduates are all heading for the dole queue.

Let's start with the current budget numbers. Last year's outturn was £660 billion of government spending. Let's figure that with the stimulus etc. of 5% extra that will be about £693 billion this year, and with a GDP 5% down on last year's very almost £1.4 trillion, that means total GDP will be about £1,330 billion, so GDP less government spending will be £637 billion. Assume for the moment that the £637 billion doesn't change if we cut the deficit (not true but let's go with it). Capital Economics is forecasting a budget deficit of £225 billion, which implies taxes raised of about £468 billion, so we can use a working figure that total taxes raised are about 35% of GDP.

Now let us try to get rid of the deficit completely. We could start by having the government spend £225 billion less, but that would mean losing taxes equal to 35% of that spending, so a better figure to go for would be £ 225 billion / (100%-35%), which would be £346 billion or 52% of government expenditure.

That isn't entirely accurate, because income tax & NI receipts would fall more in proportion to current recipts than corporation tax and VAT receipts, but then we also discounted the effect on the private sector of a fall in government spending (e.g. fewer public sector workers buying cappucinos and newspapers), so £346 billion give or take £50 billion is probably in the right ball park.

Yes, you heard it right. A £346 billion cut would be required to balance the books, compared with Balls' paltry £2 billion.

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