The 09/09/09 Post - Collapsonomics and Government Spending

09/09/09 (this post was started at 09:09 GMT as well) is one of those dates which is supposed to herald an End To The World As We Know It, and this time I think it may actually have some truth to it.

Last night on the BBC2 program Newsnight, I was intrigued to hear that there is a part of Her Majesty's Government modelling a 20% reduction in Government spending. This is the extreme case we modelled earlier this year as part of some Collapsonomics pre-prep for a NESTA pitch - it wasn't used (We reckoned they found it too contentious then ). What was also fascinating in the overall Newsnight discussion was the total unwillingness of all speakers to cover any facts about Government spending. If you look at the chart above, you can see why politicians are trying hard not to let the public connect the facts to the rhetoric. About 50% of spending is on Welfare, Health, and Education. Those cows are sacred to various (very powerful) lobbies. The next 25% is spent on Defence, Local Government, collecting your Tax and paying off the interest on money borrowed already. The last 25% is on a large number of relative tiddlers (I stopped counting at £4bn spends)

The underlying issue is that we have essentially given one entire year's worth of tax revenue (aka Government spending) - and then some - to bail out the banks (£700bn and counting) without extracting any structural changes in return, apart from putting nearly all the risk into public ownership while still privatising the profits. We are told we will get much of it back. But the banks, predictably, have chosen to continue to spend the money in much the same way that they did to bring about the whole Crunch*, with the prudent exception of making virtually no loans to consumers or small businesses, ie to the people who largely funded the bailout.

Anyway, to make ends meet now the piggy bank is empty, The Govt has to find money to pay for itself - and one of the ways they may do this is to actually cut costs rather than just tax the population some more. (I say may, it has only recently been acknowledged that they will have to reign in spending some time in the future).

So here is what we imagined in the scenario planning (in summary):

- You can't tax the population much more - taxes are already at the top of the OECD range, and in a year or so's time it will be clear that the money from the bailout is being frittered on bankers' bonuses, cheap M&A money and good old stock market speculation while at the same time strangling SME loans and mortgage spending. The public won't (possibly can't) pay up without wanting that all sorted.

- The Gov has to go for significant spending cuts or the interest rate of its debt is cranked up to nearly double, then triple, with an outlier of No More Money Loaned

- They need to cut somewhere between 10 and 20% of spend. Easy scenarios are 10% (£60bn), 15% (£90bn) and 20% (£120bn)

As you can see, 10% is painful but do-able - don't fund Scotland and Wales anyomore for example (let 'em taste real independence) and cut all spending on fripperies like International Aid (Charity begins at home) and Sport and Media. Cancel the Olympics. Sell Ch4 and the BBC for a bit of spare cash. As you can see, all those would be fairly uncontroversial and easy to pass politically

(I semi-jest - these were just tongue in cheek examples, but you can see the emotional issues - and what would you do for your 10% off then ?)

But when you get to 15%, and 20%, you are talking serious stuff. As you can see, getting out of Afghanistan is a small sum in these scenarios - heck, closing the entire Defence Complex isn't nearly enough.

So your eyes swivel inexorably to those Big 3 - Health, Education and Welfare. Health is a toughie - the UK spends 8% of its GDP on health vs Europe's 12% average and the US 16%, any cuts and you are worse than many developing countries. Education - well, that is the country's future competitiveness you're talking about. Its like corporates cutting R&D in times of crisis. (Whats that you say - all corporates cut R&D in times of crisis?). And then there is Welfare...... which gets a tad emotional, to say the least. And the "Tiddlers" are a land of Sacred Cows and Quangos that will fight to the last gravy boat to keep themselves entrenched.

As you can see, we are in for an "interesting" time of political media manouvering as both major parties try hard not to let these basic numbers and their interconnectedness soak into the public mind. But thanks to the wonders of the Internetz, here they are for your enjoyment.....

Oh - one more thing - in most countries, spending cuts greater than 10% bring massive public disorder, by 20% you often get - well, historically anyway - "regime change".

Now, we have been spending a lot of time since then working out ways of getting the UK out of this, but that is for another post. One thing is for sure however - the behaviours that got us in are the wrong ones to get us out, and we will have to see some radical structural changes to get out. Which is, of course, the last thing any political party moulded in the current system wants to hear...... and which is why the changes will be wrought by radicals. (In fact, we are of the opinion that the next few years may change the political landscape radically if these scenarios come to pass)

Contentious stuff, but that doesn't make it unlikely.

Afterthought - like many others' I've been reading the "Government 2.0 stuff" - but to its more utopian proponents, I'd say this - you need to think through how its going to help in a 10% to 20% cost reduction environment.

(*Here's a semi-prediction for you by the way - unless changes are made soon, we will have another Crunch when the banks have blown the bailout money too, but next time there will be no bailout money available, owing to above issues. You then get to a situation not dissimilar to what happened in the 1930's after the Great Crash, and led to a rash of despotic regime changes and a ing great war. Why will it be different this time..... ?)