We all agree that government spending in many Western countries is too high – stupidly high.

We are cranking up debts to pay for current consumption at a rate which suggests to the markets that we have lost our minds. The markets look to charge us higher interest rates, as lending to possibly mad people starts to look more risky.

Once that happens we drift towards Greek-style crisis – the interest on the debt we owe goes far beyond what we can ever afford to pay back. The risk that cash-machines across the Western world suddenly will stop issuing money grows apace…

The latest ploy is to announce ‘cuts’ in government spending. Shock! How dare they hurt our feelings?

But what exactly is a cut?

Any normal person would think that if the government in any one year spends £Xbn, a cut occurs if the government announces that it will spend only £Ybn, where Y is less than X. And then in fact does spend £Ybn, as promised.

That turns out to be a slippery idea.

Cuts can mean all sorts of things, some of them simultaneously. Thus:

  • spending in cash terms goes down in 2012 compared to 2011
  • spending in inflation-adjusted terms goes down in 2012 compared to 2011
  • spending over the period 2011-2015 will be less than in the period 2009- 2013 (but we’ll still spend more)
  • the rate of increase of spending will be cut sharply (but we’ll still spend more)
  • we’ll spend much less than we previously said we’d spend (but we’ll still spend more)
  • the proportion of government spending within the overall economy will go down (but we’ll still spend more)

And so on. Guido helps us see what is really happening. No cuts.  

We’ll still spend more. Instead of paddling fast to the waterfool of doom we’ll paddle much more slowly. Relax! 

What no-one appears to be mentioning is the UK’s approach to the EU Budget. This gruesome negotiation comes round again in a couple of years’ time.

One thing is obvious in all this jiggery-pokery.

Namely that if we make even these so-called cuts in UK government spending but make no comparable reductions in our contributions to the EU Budget, we are in proportional terms at least increasing our contributions to the EU Budget!

More EU = Less Westminster.

So a key test for our coalition government’s resolve and credibility will be how it responds to the usual cry from Brussels that the only direction the EU Budget can go is upwards.

Make no mistake, there are many ways in which EU spending might be not merely curbed but actually reduced.

Commission offices inside and outside (and even the WCs) are awash with banners and posters exhorting their own officials to enjoy the EU’s wisdom and programmes.

In following all this as best we can, it is important to keep an eye on the main ball.

Thus this seemingly defiant UK statement about the 2011 EU budget is largely irrelevant:

The chancellor made clear, however, that Britain would oppose a proposal from the European commission to increase the EU budget by 6% next year, a move that would mean a £600m increase in the size of Britain’s gross contribution to the EU.

"We had a lively discussion on the proposal for the 2011 EU budget, for which the European commission has proposed a 6% increase, including a 4.5% increase in administration costs" said Osborne.

"I was not alone in saying that this is unacceptable. Many countries are accepting public spending restraints and administration cuts. I am glad that has been noted at this early stage."

He insisted he had not "banged the table" on the EU budget or anything else…

Umm … why not?

Anyway, NB that the 2011 EU Budget total is an annual total within the overall 2007-2013 Financial Perspective whose size was agreed back in 2005. That money is already committed to the EU, and goes up and down as EU spending patterns unfold over the Framework period.

Thus the EU budget probably has to rise in 2011 as major structural support contracts for Poland’s roads and so on start to get drawn down, es anticipated.

No. The big prize is what happens in the 2014-2020 Financial Perspective, and to the UK’s rebate within that.

If the UK government refuses to hang in exceedingly tough on that one while ‘cutting’ services at home, using the UK veto as necessary to block a deal, it will have failed.

That said, keep an eye out for wily French stratagems. What if they offer to ‘cut’ the Budget and allow the UK to keep most of the Rebate, BUT insist on setting up some sort of EU-level income tax to fund it all..?

And NB too that if there is no agreement on a new EU Budget for the forthcoming Financial Perspective period, the old one is likely to roll over.

In effect the EU Budget can never be cut…