Hands in the Treasury, eyes on the ballot box

IS THERE really a public-spending crisis? Maybe. But scepticism is in order when politicians start talking in quavery voices about sacrifice, courage and principle. They are, after all, politicians, even when they speak like economists. Confronted by high-mindedness from the Treasury, the sensible citizen will take a pinch of salt for every pound of principle.

We have, after all, been here twice before in recent memory. Today's frightening-looking figures on government borrowing compare with the Labour government's crisis in the Seventies. Then, the public sector borrowing requirement (PSBR), as a proportion of gross domestic product, rose to a peak of 9.4 per cent. The International Monetary Fund demanded cuts. Within a couple of years, Labour had the PSBR down to 4 per cent, but the shaming IMF experience became a key theme in Tory rhetoric ever after. Now, the PSBR is not so far short of that Labour peak, at around 8.8 per cent, and it would be higher if not for privatisation receipts.

But this doesn't tell the whole story. After Margaret Thatcher came to power, her government embarked on a radical spending review similar to the one now being undertaken by Michael Portillo. Geoffrey Howe was the Chancellor and, again, the mood was gloom-laden. Public spending was said to be running out of control; the basic rate of income tax might have to rise to 45p without drastic cuts. In 1982, he raised radical Treasury options for cuts, including the replacement of part of the NHS by private health insurance.

In his memoirs, Nigel Lawson described the result as 'the nearest thing to a cabinet riot in the history of the Thatcher administration'. The report was leaked and then, as now, there was much public hoo-ha about the dismantling of the welfare state. The radical spending review collapsed.

And what followed? Within a few years it became clear that the Thatcher government was actually going to be paying back public borrowing. Commentators were speculating deliriously about the whole national debt being wiped out by the turn of the century.

Economic growth, not spending restraint, was the key. In real terms, despite rhetoric about rolling back the state, public spending carried on rising. It went from pounds 176.5bn (expressed in 1992 prices) in 1978-9 to nearly pounds 230.6bn now, with only two short downward blips. This meant the Tories could boast about record spending levels even while repaying the PSBR. Growth is the trump.

If current overspending is largely caused by recession, the current recovery may melt away most of the PSBR. It is entirely possible that there is no public spending crisis.

But this depends on knowing how much of the problem is cyclical, caused by higher unemployment, lower tax revenues, etc, and how much is structural, or 'real' overspending. In his Financial Times interview this week, John Major seemed to suggest that he thought the problem was mostly cyclical: 'This is not a runaway spending spree by government.' Yet confronted directly with the question, how much is structural? Mr Major replied simply: 'I wish I knew.'

Senior ministers assume that even during the recovery, unemployment will remain quite high - that the so-called 'natural' rate is greater than it was during previous decades. How high? They don't know. Nor do they know how strong the recovery will be, and thus how fast tax revenues will increase. On these questions, which are so central to the current debate about spending, ministers are struggling in a fog of ignorance.

What they do know is that some parts of government are spending dramatically more in ways not related to the recession. There is a mood verging on embarrassment in the Treasury about the pre-election boost in health spending and overspending in the last Thatcher years. Among the big gainers have been the roads programme and the elderly, who have gained through the growth of earnings-related invalidity benefit. As one minister put it: 'We have reclassified the elderly as invalids, and that is big bucks.' In addition, the cuts in corporation tax and the fall in North Sea oil revenue mean that this recovery will pull in money for the Treasury more slowly than the last one.

So some sort of review is basic prudence. A senior minister said yesterday: 'You cannot conduct policy on the basis of the double-six turning up again.' Despite the dicey Commons arithmetic, some cuts will have to be fought through the lobbies. Key members of the Government are in a mood to be confrontational about this, threatening rebels with the loss of the Tory whip if necessary: 'We have to decide whether as a government we are in power or merely in office.'

But the depth of the cuts will be essentially a decision about political strategy, not economics. What is considered to be the key policy reason for successive election victories? Income tax cuts. What cannot happen unless deep spending cuts are made soon? Yes, income tax cuts.

A couple of years ago, Norman Lamont explained why the total burden of taxation had risen in the early years of the Thatcher government. He harked back to Labour's PSBR, 'the skyscraping 9 per cent PSBR, which was just delayed tax increases'. Now we have a skyscraper that is almost as high. If the Government doesn't get the PSBR down fast, it will be faced with tax increases. But if the PSBR can be cut dramatically, the Government may be able to go for income tax cuts again, before the next election. A penny off the basic rate is already mentioned, but the deeper today's spending cuts, the deeper tomorrow's tax cuts, and the better the Tories' chances in a few years' time. That, not some austere Treasury morality, is the real agenda. If it looks like a politician and acts like a politician, then, whatever noise it makes - it's a politician.