Question from James May

How has this deficit come about?

In 2009/10 the government estimates it will receive from taxes £490 billions.

It estimates it will have spent around £660 billions (of which £330 billion on wage and agency costs).

Therefore the Deficit 2009/10 is £170 billions.

National Debt

At 30 April 2009 this was around £600 billions.

For 2009/10 add £170 billions

Therefore the Estimate of National Debt at 30 April 2010 is £770 billions

Starting point for deficit elimination

1          Public sector wage costs (i.e. wages themselves, employers’ pension contributions, employers’ national insurance) are around £330 billion.

2          Public sector wages are around 5% higher than the private sector on average.

3          Public sector employer pension contributions are typically 14-18% of salaries.  Private sector employer pension contributions are typically 4-6% of salary, say an average of 5%.

4          Number of employees in the public sector:

in 2001 7 million

in 2007 8 million.

5          Unemployment in April 2010      2.5 million

Unemployment in April 2007      1.6 million

Over 3 years the increase is around 900,000 (entirely in the private sector where employment among British workers has fallen over 10 years by 200,000).

Many private sector workers have opted for wage cuts and/or 4 or even 3 day working weeks to keep their jobs and firms going.

UKIP’s View

6          The public sector is just too heavy a burden for the private sector to bear.

7          This burden must be reduced in the interest of both economic necessity and equity between the public and private sectors.  Nothing else will match the scale of the problem.

8          UKIP therefore proposes no tax rises but expenditure reductions by the public sector (which is paid for by taxes on the private sector and on individuals as taxpayers):

Annual Expenditure Reductions by 2015

(These do not affect services delivered to the public, but merely restore productivity to where it was in 2007.)  Figures are constant £s per year.

(i)         Reduce top public sector salaries by 2% per annum for 5 years and medium salaries by 1% p.a. for 5 years. Low salaries will not be reduced. This will save £16 billion per annum by 2015.

(ii)        Reduce public sector employers’ annual contributions to employees’ pensions to the average in the private sector over 5 years.  This will save £33 billion.  No changes will be made to pensions already being paid.

(iii)       Reduce public sector employee numbers to 2001 levels by natural wastage (2.5% per annum).  This will save £33 billion.

(iv)       Capital cost savings of 2% give £6 billion per year by 2015.

Total annual labour & capital cost savings by 2015 £88 bn

(iv)       Benefits to be paid only to UK citizens over 21 and residents who have paid rates and taxes for 5 years.  This will save £5 bn.

(v)        Consolidate housing and other benefits into a single cash benefit, saving £10 bn p.a.  No pensioners’ benefits to change.

(vi)       Stop the UK’s annual subscription to the EU.  This will save £10 billion a year by 2015.

(vii)      Abolish most Quangos and all Regional Assemblies, reduce admin overheads due to simpler tax and benefits system (£5 bn).

Total repeat annual savings by 2015 will be £118 billion.

(viii)      One off savings: ID cards £10 billion, NHS database £5 billion.

Total annual savings by 2015                    £118 billion (A)

Plus one-off savings 2010-12                       £15 billion

B       Increasing Income by 2015

(i)         UKIP’s Manufacturing expansion programme (see Jobs & Economy leaflet) will add around £80 billion of output on which taxes paid will give £27 billion. The increased private sector (about half a million) will absorb employees released from the public sector of around the same number.

(ii)        There will be some general expansion in the economy of about 10% over 5 years (some generated indirectly by (i) above) giving around £140 billion on which taxes paid will give £49 billion

Increased real terms income p.a. to government £76 bn (B)

(C) Cost of UKIP’s long-term programmes p.a. £20 bn

(These are defence equipment, energy, flood and coastal protection, transport, manufacturing expansion.)

Net reduction in annual deficit by 2015: A+B-C = £174 bn

Surplus by 2015 is £174 bn less £170 bn = £4 billion

Estimated Total National Debt by 2015

At April 2010 it is £770 billions

Increase 2010 to 2015 is £420 billions

Therefore total National Debt by 2015 is £1190 billion

(This is much lower than any of LibLabCon’s projections (£1,400-1,600 bn) just for halving the deficit!)

Question from Frederick May

Prof says . . .

The short answer is No. You only have to look at the numbers to see this. The deficit for 2009/10 is around £170 Billion, i.e. 170 thousand million pounds sterling, or over 30% more than the government’s income. This giant sum has been borrowed by selling government bonds (called gilts) mainly to foreigners, and will take our total national debt to around £900 Bn.

The process will be repeated in the financial year just starting, and will take the national debt past £1,000 Bn (or a trillion pounds sterling) for the first time in our history. The fear among the people – mainly middle Eastern and Asian funds – who are currently prepared to buy our gilts (i.e. lend us the money) is that only small measures to reduce this enormous deficit are currently being taken or contemplated by the contenders for office after May 6.

These measures are all only one or two billion pounds at best (so-called back office savings) which are insignificant compared with £170 Bn.

UKIP’s policy briefly

In the vast total of government expenditure (£670 Bn) wage costs are overwhelmingly the predominant (70+%) part. Only in Defence is the wage cost a significantly lower proportion (50%) because of its spending on military equipment and ammunition. This means a significant reduction in the deficit must cut labour costs.

UKIP Expenditure Reduction Measures

1. There are a range of government functions we can get rid of altogether – including most quangos, which would yield around £20 Bn per year over a five year period. This would create unemployment among well-paid senior staff, many of whom already have pensions, but more junior staff would redeploy into our new manufacturing economy.
2. Our withdrawal from the European Union would save around £10 Bn per year gross from day one, some of which would continue to be spent on industrial and agricultural support – say £30 Bn over 5 years.
3. The tax and benefits system would be changed so that housing benefit (currently costing £18 Bn per year) would disappear as a separate benefit. Besides the direct saving (around £10 Bn per year net – say £50 Bn over 5 years), it would also have the beneficial effect of lowering rents in the private sector, particularly in the big cities. The only losers would be landlords who would be given a two year transition period to adapt.
4. On withdrawal from the EU we would impose a five year qualification period before those with residence or new citizen status could draw benefits of any kind. This could save £10 Bn over 5 years.
5. Job seeker’s allowance would only be paid in return for community work (i.e. workfare). Idleness will not be an option. All able-bodied single people will be expected to take a job anywhere in the United Kingdom with a living allowance paid for 6 months by the state (savings around £10 Bn over 5 years).
6. As a private view, I would advocate transferring the government’s International Aid programme (currently about £6 Bn but planned to go to £10 Bn by 2012) to the aid charities on a matched fund basis, provided the charities did not transfer cash to poor countries, but only supplied British made equipment and housing provision supported by British-trained personnel to install and maintain it until locals are genuinely ready to take it over. (At present two thirds of our aid – about £4 Bn a year – is spent by the EU, over which we have no real control. This would cease when we withdrew from the EU.) Total savings from government over 5 years would be around £25 Bn made up by a comparable sum from private sources.
7. UKIP would envisage reductions in the 3 year departmental expenditure limits (around £400 billion) of 5% in year 1 rising to 10% in year 5, to be achieved by natural wastage and some salary reductions. This will yield (net of investment in our Long-Term Programmes [LTPs]) £20 billion per annum in year 1 rising to £40 billion per annum at the end of year 5.

Government Income under UKIP’s policies

Point 1

UKIP’s manufacturing expansion programme of 5% per annum over 10 years and its Long-Term Programmes (LTPs) [see the Jobs and Enterprise paper “Produce and Prosper” under “Policies” on ukip.org] would add around 1% to growth, making in all about 1.5-2% in the economy’s GDP in year 1 (2010/11) to about 4% in year 5. Government revenues (at about 40% of GDP) would grow on these figures by around £10 billion in year 1 to about £105 billion per annum in year 5 (2015/16).

Point 2

On these figures, the 2009/10 deficit of £173 billion (my figure) would fall to £120 billion at the end of year 1 (2010/11) and to zero at the end of year 5. The accumulated national debt would rise from about £900 billion at year zero (2009/10) to around £1330 billion (about 83% of GDP). After that the national debt would be reduced if no additional government spending was allowed.

The Labour government’s target reduction to one half of the present £170 billion over 4 years from now would add about £580 billion by the end of 2015/16, bringing the total national debt to £1,480 billion (about 92% of GDP) and continuing to rise at a rate of £70-80 billion after that (on present declared plans).

Comment

Public sector average pay is now higher than in the private sector, much higher if you add in the public sector’s final-salary pensions which now have a funding deficit of over £1,000 Bn.

As a personal view I favour salary reductions for senior staff in the public sector, particularly in local government and the police, pegging their salaries to those of the appropriate grade in the civil service. Middle and lower salaries would be frozen for a three year period to bring them into line with the private sector. Together with “natural” turnovers of staff (currently 8% in the NHS) some net reductions of about 5% in the public sector wage bill would yield around £30 Bn per year, effectively closing the gap.