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Spending Cuts Will Need To Be Bigger Than Revealed 20% Predicted Now

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http://business.timesonline.co.uk/tol/busi...icle6841133.ece

Spending cuts by the next government will need to be bigger than so far revealed, according to new estimates.

John Hawksworth of Price Waterhouse Coopers, the accountant, calculates that if the Conservatives want to preserve the health and overseas aid budgets and reduce the budget deficit faster than Labour, most departments will need to cut their spending by 20% over three years.

Hawksworth, who based his calculations on Treasury documents leaked last week to the Tories, believes borrowing will fall at a slower rate than the Treasury expects.

A separate report from the Centre for Economics and Business Research (CEBR), based on official figures, shows that many sectors are vulnerable to a downturn in public spending, including pharmaceuticals, medical and defence equipment.

The CEBR points out that the public-sector accounts for 11% of the demand for paper, 15% for legal services and 16% for computers and office machinery.

Credo, a consultancy, says in its latest client journal that many UK companies have significant exposure to public-spending cuts, though some will benefit from the search for efficiencies. Those with the heaviest exposure include Babcock, Amey, Serco, Galliford Try, Costain, Balfour Beatty and Jarvis.

Market attention this week will focus on the Bank of England’s monetary policy committee minutes, to be published on Wednesday. Sterling was hit hard last week by a hint from Mervyn King, the Bank governor, that it could cut the interest rate on some commercial bank reserves held at the Bank.

I bet many are shocked that the previous estimates of budget cuts needed where wrong, I mean who'd have thought 10% would not have been sufficient.

The economy is going to get much worse, anyone care to argue that the current bounce in house prices is sustainable with 20% budget cuts?

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The economy is going to get much worse, anyone care to argue that the current bounce in house prices is sustainable with 20% budget cuts?

That is if 20% is enough. In round numbers, the deficit is 180e9 and total departmental spending is 600e9. I make that 30%. Following the cuts, social security costs would go up and tax income down. Without any basis, I guess that at least 20% of the cut spending would have come back as tax in the same year. So that is another 6% spending cut on top of the 30%. Someone else can sum up the geometric series.

The above is still a good case scenario where the private sector GDP stops falling. Furthermore, the suggested 20% cut (or is it a 10% cut, or just a 0% growth?) of course assumes the economy will happily start improving while weighed down by a public sector that is proportionally bigger than at the top of Labour's investment^H^H^H^H^H spending binge. Finally, there is no provision anywhere for unwinding QE and for the increased borrowing costs that the markets will surely impose.

There are about three alternatives:

- green shoots take hold soon

- there are massive public spending cuts, taxes go up, GDP falls a lot (but maybe not as much as in the Great Depression)

- massive budged deficit remains. The electorate will not agree to immediate cuts in living standards even when told the consequences. The country follows Hungary, then Argentina, then Zimbabwe.

The spending numbers and the size of the deficit are broadly correct. You may disagree with the rest, and please tell me if I misunderstood something so I can slow down the preparations to emigrate. In theory the country could sustain the current irresponsible fiscal situation for several years, however I don't see the debt markets would be willing to fund that if there is no prospect of things getting better. In other words, they will not necessarily wait for the national debt to hit the projected 180% of GDP before not lending to the government any more. Of course, the next government may have a way around that, which does not bear thinking about.

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Guest P-Diddly
That is if 20% is enough. In round numbers, the deficit is 180e9 and total departmental spending is 600e9. I make that 30%. Following the cuts, social security costs would go up and tax income down. Without any basis, I guess that at least 20% of the cut spending would have come back as tax in the same year. So that is another 6% spending cut on top of the 30%. Someone else can sum up the geometric series.

The above is still a good case scenario where the private sector GDP stops falling. Furthermore, the suggested 20% cut (or is it a 10% cut, or just a 0% growth?) of course assumes the economy will happily start improving while weighed down by a public sector that is proportionally bigger than at the top of Labour's investment^H^H^H^H^H spending binge. Finally, there is no provision anywhere for unwinding QE and for the increased borrowing costs that the markets will surely impose.

There are about three alternatives:

- green shoots take hold soon

- there are massive public spending cuts, taxes go up, GDP falls a lot (but maybe not as much as in the Great Depression)

- massive budged deficit remains. The electorate will not agree to immediate cuts in living standards even when told the consequences. The country follows Hungary, then Argentina, then Zimbabwe.

The spending numbers and the size of the deficit are broadly correct. You may disagree with the rest, and please tell me if I misunderstood something so I can slow down the preparations to emigrate. In theory the country could sustain the current irresponsible fiscal situation for several years, however I don't see the debt markets would be willing to fund that if there is no prospect of things getting better. In other words, they will not necessarily wait for the national debt to hit the projected 180% of GDP before not lending to the government any more. Of course, the next government may have a way around that, which does not bear thinking about.

West meets East . . . I keep saying it, but usually get torn a new ar$ehole by some who think the Western economic model isn't simply a Ponzi scheme in it's death throws.

How can they tax more?

Doesn't matter which way you cut it . . . default and national bankruptcy has to be the only outcome from all this. After which a much poorer, simpler, likely more violent Britain will emerge.

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Guest sillybear2

The government and The City has gutted the wealth generating capacity of this country for decades now, and they're somehow surprised that we're now bankrupt?

You cannot base an economy on borrowing and consumption.

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Guest Steve Cook
http://business.timesonline.co.uk/tol/busi...icle6841133.ece

I bet many are shocked that the previous estimates of budget cuts needed where wrong, I mean who'd have thought 10% would not have been sufficient.

The economy is going to get much worse, anyone care to argue that the current bounce in house prices is sustainable with 20% budget cuts?

Exactly

Given that one in five of us is employed by the state, any significant reduction in spending by the state translates as significant reductions in its workforce. Meaning significant rises in repossessions of the houses of those workers. This is not to mention the reduction in spending in the high street of those workers. Thus, reducing the incomes of everyone else.

House prices are set to go one way only over the coming months. And its not up.

Edited by Steve Cook

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Guest Steve Cook
West meets East . . . I keep saying it, but usually get torn a new ar$ehole by some who think the Western economic model isn't simply a Ponzi scheme in it's death throws.

How can they tax more?

Doesn't matter which way you cut it . . . default and national bankruptcy has to be the only outcome from all this. After which a much poorer, simpler, likely more violent Britain will emerge.

yes

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Guest P-Diddly
Exactly

Given that one in five of us is employed by the state, any significant reduction in spending by the state translates as significant reductions in its workforce. Meaning significant rises in repossessions of the houses of those workers. This is not to mention the reduction in spending in the high street of those workers. Thus, reducing the incomes of everyone else.

House prices are set to go one way only over the coming months. And its not up.

Stevie, they may not rise but affordability for most now is zero. No job stability, many unemployed. Problem now worse than before.

Why can't the British get a mentally stable government for once? Without all the silliness the UK would be (again) the best place in the World. Mind you everywhere's pretty fvcked now . . .

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Guest Steve Cook
Stevie, they may not rise but affordability for most now is zero. No job stability, many unemployed. Problem now worse than before.

Why can't the British get a mentally stable government for once? Without all the silliness the UK would be (again) the best place in the World. Mind you everywhere's pretty fvcked now . . .

Agreed.

Prices will fall. But capacity to pay for them will fall faster.

Either as a consequence of having less money due to taxes rises and the level of public services reducing (deflationary), or as a consequence of a reduced value of the money in their pocket due to QE, whilst at the same time seeing no increase in their wages to compensate (bi-flationary).

Probably both.

One way or another, in real terms, the majority get to be a lot poorer. That much is certain.

Edited by Steve Cook

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Why can't the British get a mentally stable government for once?

We'd need a mentally stable electorate first...

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Guest Steve Cook
We'd need a mentally stable electorate first...

We certainly are funny old creatures. That's for sure.

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Guest Steve Cook
Yes, but will spending cuts alone be enough?

I suspect whoever wins the GE, tax rises will be unavoidable.

Too many cuts + too many tax rises implemented too soon = major civil unrest.

On the other hand, too few cuts + too few tax rises implemented too late = soaring inflation + potential state bankruptcy + potential civil unrest

It's a conundrum aint it.........

Edited by Steve Cook

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http://business.timesonline.co.uk/tol/busi...icle6841133.ece

I bet many are shocked that the previous estimates of budget cuts needed where wrong, I mean who'd have thought 10% would not have been sufficient.

The reason 10% is not going to be sufficient is that it can't be applied across the board.

The benefits bill is going to go up due to increased unemployment. So, not only can the "benefits" departments not contribute their 10% cut, their increased spending is going to have to come from cutting other departmnenst budgets by even more.

tim

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Guest P-Diddly
Agreed.

Prices will fall. But capacity to pay for them will fall faster.

Either as a consequence of having less money due to taxes rises and the level of public services reducing (deflationary), or as a consequence of a reduced value of the money in their pocket due to QE, whilst at the same time seeing no increase in their wages to compensate (bi-flationary).

Probably both.

One way or another, in real terms, the majority get to be a lot poorer. That much is certain.

Just need to add this one-way street that is globalisation in there too. I tried explaining this to some angry soul on here the other day (probably my fault I was struggling with how to describe it) that the reason there were 3x income prices before is because the UK created real wealth (long time ago now), making things, innovating etc.

It's tricky to explain, but the reason people live in mud huts and shanty's in other countries is because they don't have or never did have real wealth creating societies. Okay, many have mineral resources which are being robbed and there's no distribution of wealth etc, but the fact remains that if your real income, that which you create is bo-bu**er all, your purchasing power is the same.

Much of this comes down to bent governments in these countries and a absence of fair and equitable wealth distribution, but in the UK's case, loss of purchasing power of everything, not just iPods is coming to pass. The angry chap made a valid point that there are 1,000,000 empty homes (dwellings) in the UK. These become uninhabitable fast, derelict even.

Like our Icelandic counterparts went back to haddock catching, what will the UK do?

Edited by P-Diddly

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http://business.timesonline.co.uk/tol/busi...icle6841133.ece

I bet many are shocked that the previous estimates of budget cuts needed where wrong, I mean who'd have thought 10% would not have been sufficient.

The economy is going to get much worse, anyone care to argue that the current bounce in house prices is sustainable with 20% budget cuts?

I think theres unnesessary angst about these cuts.. lets face it there is huge wastage in the system...( as an example a few years ago labour estimated there were 100,000 needless civil service posts, and recently have themselves recongnosed about £9bn per year of wastage).... I really think 20/30% cuts should be deliverable without knocking frontline services.. its been done elsewhere and as long as the cut targets are sent down far enough through the various organisations it should be deliverable... however of course "not wasting" that extra 20/30% does and will have a negative effect on the economy ( less things will be bought and built and less people employed)... but I for one would rather have efficiency than wastage.

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Too many cuts + too many tax rises implemented too soon = major civil unrest.

On the other hand, too few cuts + too few tax rises implemented too late = soaring inflation + potential state bankruptcy + potential civil unrest

It's a conundrum aint it.........

It's catch 22 alright.

There are no easy exit strategies from the mess we are in.

I doubt many will be willing to take wages cuts, too many don't understand basic economics.

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I think theres unnesessary angst about these cuts.. lets face it there is huge wastage in the system...( as an example a few years ago labour estimated there were 100,000 needless civil service posts, and recently have themselves recongnosed about £9bn per year of wastage).... I really think 20/30% cuts should be deliverable without knocking frontline services.. its been done elsewhere and as long as the cut targets are sent down far enough through the various organisations it should be deliverable... however of course "not wasting" that extra 20/30% does and will have a negative effect on the economy ( less things will be bought and built and less people employed)... but I for one would rather have efficiency than wastage.

The problem is that the most 'expendable' in this scenario also weild the most influence- so you are likely to see the empires of management remain relatively untouched while the front line gets decimated.

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Guest P-Diddly
The problem is that the most 'expendable' in this scenario also weild the most influence- so you are likely to see the empires of management remain relatively untouched while the front line gets decimated.

One of my MD's held a board meeting last year. The subject? Job losses.

"We need to make serious staff cut backs . . . can't keep this level of overhead . . . blah, blah"

Lot's of director heads nodding falsely in solemn agreement, concerned frowns.

Little did they know he was talking about them. Dumped the lot and kept nearly all of the workers.

MOOOOOOOHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA! . . . and breathe.

Edited by P-Diddly

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The problem is that the most 'expendable' in this scenario also weild the most influence- so you are likely to see the empires of management remain relatively untouched while the front line gets decimated.

Managers feel you can never have too many managers.

Where I work there are about 6 at the bottom supporting a pyramid of about 10 managers if you view the crazy management structure which has been implemented.

They seem to love chinese whispers A must report to B must report to C must report to D must report to E must report to F must report to G

A isn't allowed to talk G as it must go up the chain of command.

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Guest P-Diddly
Managers feel you can never have too many managers.

Where I work there are about 6 at the bottom supporting a pyramid of about 10 managers if you view the crazy management structure which has been implemented.

They seem to love chinese whispers A must report to B must report to C must report to D must report to E must report to F must report to G

A isn't allowed to talk G as it must go up the chain of command.

Public or private sector?

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if the govt's debt is increasing at some silly rate (Can't remember was it 12k a minute?) then surely the spending cuts needed are also going up in proportion?

And at what point do they stop all spending?

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The reason 10% is not going to be sufficient is that it can't be applied across the board.

The benefits bill is going to go up due to increased unemployment. So, not only can the "benefits" departments not contribute their 10% cut, their increased spending is going to have to come from cutting other departmnenst budgets by even more.

tim

No they have to cut the benefits bill, they will not have a choice.

But it will middle class benefits that go.

No more universal child allowance and tax credits will be paid at a lower income level only.

40% tax relief on pension contributions must be under threat too.

All this will do of course is create more perverse disincentives to work.

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