Spending is too high, and one of the main problems is pensions. The current unfunded liability for public sector pensions is close to £1trio. The bad news is there is no "pot" to pay for it, but that is also the good news. It means that 1) the "pot" didn't lose value when equities came off, because it didn't exist and 2) the rules can be changed. Option 2) is an interesting one. For an example in the private sector, take the BA pension deficit, currently estimated at £3.5bio. Any profits that BA ever make simply go into this black hole to fund ridiculously generous final salary pension schemes. The pension fund will simply go bust, there is no alternative, hence pilots are now moving money out, at a loss (better to take a loss and keep something than wait and lose it all).
The analogy with the UK government now becomes slightly unnerving. We simply cannot afford our current level of spending (be it on final salary pensions starting at the age of 60 for 80 pct of public sector workers or even on the NHS), it's not a matter for opinion, it's a fact. "Cost efficiencies" are utterly irrelevant. What needs to happen is that the public sector either shed a large number of jobs, sections are privatised, or they take a pay cut (in other words, welcome to the real world). The unions will resist this, so the logical inevitability here is industrial action.
We're getting a taste of it already with the suicidal BA strike over Christmas (this will surely finish the company off). Over the next few years, we will see much worse, and possibly civil unrest.
I'm not completely gloomy here.. the Brits are nothing if not pragmatic. However, the re-adjustment process is going to be painful. I just hope that it's the government that decides where spending cuts fall, rather than the market imposing it with a complete collapse in the bond market (hello Argentina).
