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UK, like most other recession hit nations of the western world is witnessing burgeoning budget deficit. There is a big question on how to reduce it. Budget deficit can be reduced either through cut in expenditure or increase in revenue. Let's look at spending cuts first.
Actually it is easy for everybody to say that gov. spending needs a cut but pinpointing the cut is always a difficult task.
Commenting on areas suitable for cut requires much more study but there are couple of straight inferences. Guardian has provided this wonderful graphics to study UK's gov. expenditure. Click here to download a pdf of the graphic shown above. Here are few areas where there can be spend cuts.
1. The 4th largest spend bubble representing "Her Majesty's Treasury" which saw a momentous growth of 49891% over 2007-08 went into saving collapsing banks and other financial institutions during the financial crisis. It is expected to reduce sharply in coming year, thanks to upbeat results posted by most of the commercial banks. Banks have in fact also started to pay the debt back to the government which is a healthy sign.
2. Department of Health representing GBP 109bn spend is itself an obese. Gov. needs to look into the health of the health dept. McKinsey advised the gov. in Sep 09 to cut 10% of the staff over the next 5 years. However, the Department of Health rejected the advice saying many services needed more staff, not fewer. Both were right at their own place. While NHS desperately needs more skilled, experienced medical staff (doctors, surgeons, experts) as pointed out by the Health dept. , McKinsey advised cuts on low skilled clinical and admin posts.
In fact you don't need to be at McKinsey to witness the lousy nature of admin staff working at most of the medical centres in UK. At least my experience around London has been pathetic to say the least.
Perhaps it s high time gov. takes stock of the performance of NHS staff and help develop a more balanced health care system where both private and public players have equal participation.
3. Though, I am not in favour of this but defence spending is likely to go down in the coming year. With almost all the partners of war against Afghanistan and Iraq suffering from the financial crisis, the pressure is high to cut the spending on these wars.
Moving on to increasing gov. receipts. One advantage for Britain is that it's not part of the Euro zone. Thus it can allow the sterling to depreciate to boost export. In fact if you notice, there has been unending announcements by UK gov. that spend cut is needed. However, there has not been any major step in the direction. (I appreciate that !) In fact, now all the decisions on spend cut have been officially postponed till post election. Of course with a prediction of hung parliament, these tough decisions would be postponed further. That's actually not all that bad. Sometimes, in a thriving capitalist economy, lazy gov. is a good gov.! On the other hand sterling is down 24% on a trade-weighted basis since August 2007. This can give a boost to country's export. Britain needs to realize that it is still the world's 6th largest manufacturer. The much hyped financial sector even at its peak contributed 8% to the GDP in comparison to 12% by manufacturing. Surely, manufacturing has been neglected for long in Britain in terms of gov. impetus, private investment and also a high exchange rate (before 2007 since sterling started to tumble).
Thus my overall suggestion would be to keep the exchange rate competitive, put some weight behind export as suggested here. Keep making promises on expenditure cuts, the way you have been doing without showing any substantial cut. The continued public spending will support domestic industry and domestic demand while promises and strong show of intent for spend cut will reduce the risk of a rally against sterling (at least for as long as it can). In spite of the big areas needing spend cut, you can wait and watch the Financial stability bubble (Biggest part of the spend on "Her Majesty's Treasury") go down without any tough political decision thus keeping the critics quiet for some more time :) Help the industry to cover the budget deficit if you are not prepared to take tough decisions on spending cuts on NHS (National Health Services) and DWP (Department for Work and Pensions)!
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