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Protecting the economy by cutting the deficit

As the major political parties debate how to reduce the budget deficit, Professor Malcolm Prowle from Nottingham Business School, offers suggestions on how to cut public spending

Professor Malcolm Prowle

There is virtually a consensus among all political parties that the size of the government's budget deficit (and the associated borrowing requirement of £176bn) is unsustainable and needs to be substantially reduced.

While some of the deficit will be reduced through tax increases the vast bulk will require substantial reductions in public spending.

However, the big political debate, and the difference between the two main parties, concerns how quickly the budget deficit should be reduced and in what areas of public spending the cuts should fall.

The government argues that cutting the budget deficit too quickly will endanger any economic recovery that might be taking place. This seems to be a serious point especially since last week's economic statistics, which indicated miniscule economic growth, suggests that the UK economy is still very fragile and cutting public expenditure too quickly may tip the economy back into recession.

On the other hand there are strong pressures to cut public expenditure quickly and drastically. There are concerns that if firm plans to cut the budget deficit are not published soon (by whichever party wins the election) then the UK may lose its prestigious triple A credit rating meaning that either the UK would have trouble raising additional borrowing or the cost of that borrowing would rise sharply.

So the dilemma is how best to cut public spending in a manner which satisfies the credit agencies and lenders while at the same time minimising further damage to the real economy of the country.

This is not easy to do but some particular themes might be considered:

• infrastructure focus – there might be merit in making substantial cuts in expenditure on direct service delivery and re-directing, at least, some of the money saved into major infrastructure projects (eg roads, buildings, transport etc).

As well as improving the basic infrastructure of the country this would provide a strong stimulus to the construction industry which is a key driver of the whole economy.

• internal focus - public expenditure which increases the demand for UK produced goods and services will have a positive effect on UK economic activity, while expenditure on imported goods will not have such a positive effect and will also contribute towards the UK's large balance of payments deficit.

The aim is to try and ensure that when decisions about public expenditure are being made there is an ongoing focus on cutting imported items rather than UK produced goods and services even if the cost of the UK goods is higher and value for money is lower.

The trick is how this should be done, since any form of regulation or proscription would probably be declared illegal by one of the many supra-national bodies such as the EU, GATT etc. However, it could also be the case that the UK is a "soft touch" in relation to these matters. Hence it is possibly a case of public service managers being encouraged to focus on UK goods and services and being provided with assurances that they will not be penalised for avoiding cheaper imports in preference for UK produced items.

Professor Malcolm Prowle is professor of business performance at Nottingham Business School. He is director of the International Centre for Business Performance and Lean Leadership and course leader for the MSc in Public Service Management

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