Goverment cuts to be more severe than predicted

Travel management companies should brace themselves for the impact of enormous government cuts, according to one of the UK's leading political commentators.

The broadcaster and journalist Andrew Neil was speaking to members of the Advantage Travel Centres agency consortium at its annual conference, being held this year in Lucerne, Switzerland.

Neil spoke last year at the group's conference in London, where he made a series of predictions regarding the evolving landscape of British politics.

Having seen most of his predictions come true, excluding that of the Conservative-Liberal Democrat coalition, he was invited back to share his views on the new government and the economy.

Worryingly, for many of the small business owners in the auditorium, Neil said cuts in public services would be far greater than anything politicians have admitted to during the election campaign, that businesses faced rises in taxes, and that the plight of Greece had potentially damaging consequences for a "vulnerable" Britain.

The Paisley-born hack acknowledged the UK was firmly out of recession, but warned it was hard to be optimistic if the figures were studied.

"The arithmetic in this is quite formidable," he said.

"The politicians have made it much more difficult to cut anything because they've ring-fenced so much. They've ring-fenced welfare benefits, which accounts for 30% of government spending.  They've ring-fenced spending on health, school and international aid and, of course, they have to pay the interest on our debt whether they like it or not. That's another 30% of government spending. So we're now down to 60% being ring-fenced, supposedly untouchable, and only 40% of spending where the scale of the cuts will fall.

"It just won't happen. It would mean, for example, that the whole of the police force would have to be abolished three times. It would mean that the army, the navy and the air force would have to be abolished as well."

Neil said politicians would now set about slashing funds from previously safe budgets - and at an alarming scale.

"The fences will be dismantled. In the end, nothing will be ring-fenced, cuts will be widespread, they will include frontline services, something we were not told during the campaign and, in fact, something that was often explicitly denied, and taxes will rise further than you've been told."

He said that it would soon become apparent to those in power that no matter which cuts they decide to make, they cannot control the "events that matter". He said the financial storm brewing in Europe, with Greece at the epicentre, would not leave the UK unscathed, and that our own soveriegn debt crisis made us even more vulnerable.

"Events in Greece threaten to undermine the whole edifice of the Eurozone and spark a financial contagion that will engulf everybody.  The German fear of inflation and of having to bail out one Club Med country after another is not fully appreciated in Britain. We have been so diverted by our own election campaign and the amazing aftermath of it that we haven't appreciated or taken onboard the public anger in Germany at having their taxpayers money being used to bail out the profligate Greeks. There is as much anger in Germany about this as there was in the UK about MPs expenses.    

"We can't overestimate the significance of the sovereign debt crisis. In order to bail out the banks and stop the financial crisis, we printed masses of money and gave it to the banks and told them to buy government bonds. So they piled billions of government bonds, known as sovereign debt, onto their balance sheets.

"Now we have a sovereign debt crisis. And where is all that debt? It's on the balance sheet of the banks! Where can the banks go? There is no where else to go if your balance sheet is full of sovereign debt. After all, you can't buy private debt because that's not worth as much. So the sovereign debt crisis goes to the heart of the financial crisis that we are now in, and the danger is that it ripples through the Mediterranean and then hits Britain, because we this year, as a percentage of GNP, will borrow just as much as the Greeks. We are just as vulnerable as Athens to this sovereign debt crisis because of the amount we are having to borrow.

"The problem in Greece is not a lack of liquidity, or a lack of cash flow, we all know how that can be a problem but you can borrow through that. It's not that Greece is illiquid  - Greece is insolvent. And that can only be resolved by restructuring the debt over a long payback period and cutting the payment back to 75 cents in the dollar.

"There is no way out that Greece can avoid a default in its debt. If it does, the banking crisis will spread through the region and we will not escape from it. Sovereign debt is now being considered by the market as dodgy as sub-prime was at the beginning.This is why even the Lib Dems have agreed to cut our debt now."

Despite the doom and gloom, Neil told the travel sector that is should remain optimistic about the economy's prospects. He said the coalition, while fragile, was a turning point for politics, and along with the forthcoming Labour party leadership contest, it heralded the start of a new generation in politics from which we should all take heart.