I was recently having lunch with a distinguished former head of a UK government body. He pointed out that no government has ever managed to reduce public spending, only reduce its rate of growth.
I thought over this as I examined the most recent growth domestic product (GDP) figures for the UK showing that the economy grew by a paltry 0.2% in the second quarter of the year March to June, a drop on the first quarter's 0.5% increase. Ministers may try and blame the disappointing figures on the Royal Wedding Bank Holiday in April or the unusually hot weather at that time but the underlying fact is that the economy is at standstill. Part of this is due to the sharp rise in energy and food reducing personal spending power. With wage rises also stagnant people simply have less money to spend, thereby deflating the economy. The recent double digit increases in gas prices will take yet more money out of consumers' pockets.
Another reason for the slowdown is the impact of public spending cuts. The UK Chancellor George Osborne has gambled on a tight timetable for sorting out the deficit through his three-year Spending Review, with big upfront cuts in areas like local government, the civil service and police levelling out by 2014 in time for the next general election. His hope is that between now and then the cuts will convince the international markets that the UK is serious about tackling its deficit, thereby keeping interest rates and the cost of borrowing down. But he is also gambling on the private sector part of the economy growing to fill the gap left by public spending cuts.
Unfortunately the GDP figures show that the private sector is not growing sufficiently to fill that gap and the worry must now be that the third quarter's figures, June to September, will actually show a minus figure as spending cuts really bite. The paradox is that even as the cuts feed into the figures, the level of overall public spending may stubbornly refuse to go down. This is because of lower tax revenues, riding demand in areas like adult care, and an increase in welfare costs as unemployment in areas hit by public sector job losses increases - and don't forget that many private companies are also hit by public spending cuts.
We could well see a scenario, as my lunch companion said, where spending cuts merely reduce the increase in overall public expenditure rather than actually cut it. This brings me to George Osborne's third gamble, namely that the international money markets will continue to be satisfied that the government is serious about tackling the deficit, keeping interest rates low - even if it is only the increase in spending that is being curtailed - and will be relaxed about an apparent uplift in public spending in time for the 2015 general election. By then Mr Osborne will be telling voters that the worst cuts have been achieved, the economy is back on course and the deficit addressed. Economics is not so much a science as an art.