Wednesday, 23 June 2010

Budget II - Detailed Analysis

After my initial comments, I thought it would be best to do a more detailed analysis on the Budget.

The favourite complaint about the Budget seems to be that as the recession started in the private sector, why is the public sector being hit so hard?

First, recession is a stage in the economic cycle, termed as two consecutive quarters where there is negative growth in GDP (the size of a country's economy). All economic growth comes from the private sector. The public sector, by definition, is wholly subsidised by the taxpayer, and therefore does not provide real economic growth. The recession may have started in the private sector, but that's because it can't very well start anywhere else. The recovery will also by driven by the private sector.

Next, this graph from the HM Treasury website illustrates the current financial situation quite well:


It quite clearly demonstrates that, in every year since 2002-2003, the Labour Government operated the public finances in a state of deficit, spending more than they were getting in tax revenues.

It may have been the recession that caused borrowing to rise, but we were already spending too much before the recession. This is why we're in this horrible mess. Labour have been mismanaging the public finances for years, leaving us ill-prepared for the banking crisis, which triggered the deepest and longest recession in living memory. Their legacy is a hugely bloated public sector, now twice the size that it was 10 years ago, with a massive funding gap. And with the tax burden at roughly 40% of GDP (yes, 40% - for every £5 in the British economy, £2 is syphoned off as tax), revenues are unlikely to recover quickly enough to support this huge dead weight.

The only answer, therefore, is to cut public spending, and to minimise tax rises as far as possible. This increases the chances of revenues rising and brings our currently unsustainable public spending in line with what our (hopefully now rising) tax revenues.

The Budget did that.

Of course, the loony Left will continue to blame the banks, because that's the easiest thing to do. The banks are not innocent victims of this debacle, to be sure. The last few years have highlighted major issues in how they do business, taking unwarranted gambles and then expecting the taxpayer to clean up the mess. However, the responsibility for regulating the banks falls on the Government. And it is that lack of regulation at the macroeconomic level which allowed them to behave so irresponsibly. The banks are not blameless. But nor are they wholly responsible. They behaved irresponsibly and took unwarranted risks. But so did the Government, by refusing to regulate them properly, instead focusing regulation on smaller providers of financial services, and by mismanaging the public finances to such an extent that when the inevitable recession hit, we were not prepared for it.

This Budget was the best that could be had under the circumstances.

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