Sunday, July 11, 2004
Cash for the patient - but it's not a cure
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

THIS is a tricky time for a Sunday economics columnist. The big event in the diary is Gordon Brown’s comprehensive spending review, to be published tomorrow. Yet I know there is no topic more guaranteed to make people curl up under their duvets for an extra hour’s sleep than public spending.

The trouble with public spending is the numbers are too big to grasp — only chancellors and tycoons like Philip Green think in billions — and the claims and counter-claims are confusing.

So first I have to convince you that it is important. Oliver Letwin, the shadow chancellor, has helpfully provided 20 fascinating facts about what he calls “big” government.

Some of these hit the button, for example that the number of NHS managers is increasing three times as fast as the number of doctors and nurses. There are more civil servants in Defra (the environment, food and rural affairs department) than there are dairy farms.

This recalls an anecdote told by Ronald Reagan, and retold by my colleague Irwin Stelzer. The late president was visiting the US Department of Agriculture when he noticed one of the officials in tears. “What’s wrong with him?” he asked, only to be told: “His cow has just died.”

Letwin had other good examples, though I am not sure whether we should be pleased or angry about one — that the civil service is the size of Sheffield. That doesn’t sound bad for a country of 60m. But overall, public-sector employment is 10 times the 527,650 full-time civil service jobs.

The reason we should be concerned about public spending is that it is our money — lots of it. This year total spending will be £488 billion, 41.5% of gross domestic product. Tomorrow’s review will push it up to £579 billion, 42.2% of GDP.

That is a sharply rising share of the economy. As recently as 1999-2000, after Brown’s early tough years, spending was only 37.4% of GDP. In cash terms, the rise means spending will be up by more than 80% from the £315.6 billion figure Labour inherited in 1997 from the Tories at a time of low general inflation (although high public-sector inflation).

This comprehensive spending review (CSR) will be Brown’s fourth, the first coming in 1998 and then every two years. Spending is set for the following three years, in this case 2005-6 to 2007-8. There is always an overlap year that covers the final year of the previous CSR — 2002 — and the first year of the new one.

The chancellor denied in a speech to the CBI last week that he would be playing politics with this week’s review. There would, he insisted, be no attempt to buy votes with pre-election spending bribes.

That may be true, although, as the Institute for Fiscal Studies (IFS) notes, spending is heavily skewed to the first year, 2005-6 — part of which should come before the election — with much slower growth thereafter. Spending will rise 4.1% in real terms in 2005-6, but by only 2.5% in 2006-7 and 2.8% in 2007-8, safely after the election.

Even if the chancellor succeeds in this slowdown, economists think he will have to raise taxes to meet his golden rule of borrowing only to fund public investment.

The recent record of spending, moreover, has been one of greater largesse than originally planned. In his 2000 review, Brown set a total of £439 billion for 2003-4. The outturn, latest figures show, was £20 billion higher. Some of that was deliberate but some reflects the fact that once the spending cat is out of the bag it is hard to force it back in.

There are particular strains at present. Health, in the shape of John Reid, is growing fat on 7% annual real increases in spending to the end of the decade.

Education does slightly less well, with 3.9% annual real growth over the next three years. But all other departments will have to make do with only 2% annual real growth in spending over the three years and, because of front-end loading, just 1.4% annual growth over the two years from April 2006.

Even within those crumbs from the chancellor’s table, there will be winners and losers. Home Office spending on national security, law and order and anti-social behaviour will do well. So will the aid budget, although campaigners say the government will still fall short of the 0.7% of gross domestic product target it set before the 1997 election. There will also be a lot of extra spending on “social” housing, run by housing associations.

But many ministers, like modern-day Oliver Twists, have gone to the Treasury and asked for more, only to be greeted with contempt. There will not be much celebration this week from Geoff Hoon at defence. Patricia Hewitt at trade and industry has had to accept big job cuts.

Will the new targets be credible? The Treasury is relying heavily on efficiency savings to achieve its targets. Departments are supposed to cut their running costs by 2.5% a year. They are also supposed to cut the head count, with Brown planning thousands more job reductions on top of the 40,000 — from work and pensions and the merger of Inland Revenue and Customs and Excise — he flagged up in the March budget.

Even with the help of Sir Peter Gershon, who recently stepped down as the government’s efficiency czar, these savings sound like a tall order. And, as the IFS points out, the Treasury has been here before, when Michael Portillo was chief secretary in 1994 and under Brown himself in 1998.

The other big question is about value for money. National Statistics, the official agency, has controversially revised its figures for NHS output upwards and drawn some flak for doing so. In fact the revisions — partly as a result of giving big operations bigger weight than small ones — do not seem unreasonable.

But even on the new figures, a 93% increase in NHS spending since the mid-1990s produces only a 29% increase in health “outputs” — consultations, operations and treatments. And they show public-sector productivity is falling.

The public sector will get a life-giving injection of tens of billions tomorrow. The patient, however, remains rather sick.

PS: Nearly 200 years ago Lord Macaulay, the historian, wrote: “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.”

It is easy for politicians to be protectionist. This government, in particular Patricia Hewitt at the beleaguered Department of Trade and Industry, is to be commended for a robust free-trade stance.

Under previous Labour governments, protectionism was never far below the surface. Under this one it does not exist. Hewitt’s new white paper, Making globalisation a force for good, is an impressive document. Compared with Paris, Brussels, Washington and Tokyo, the DTI in London is a powerful advocate of free trade.

That applies to “offshoring”, the transfer of jobs overseas, as much as to tariff barriers. Hewitt and her colleagues have recognised that it would be incompatible to put up barriers to offshoring — which produces net benefits for Britain — while proclaiming the virtues of free trade.

Every job loss, it points out, has been followed by at least one job gain. It is a pity some of the business leaders engaged in offshoring have chosen to keep their heads down.

Last week I took part in a seminar on the issue. Offshoring is so hot that two of my fellow panellists have produced books: Outsourcing to India: The Offshore Advantage, by Mark Kobayashi-Hillary, and What’s this India Business?, by Paul Davies. Given the weather, it may be time to offshore this column.

From The Sunday Times, July 11 2004

Comments

How ironic of you to end the article with the phrase 'Given the weather, it may be time to offshore this column'

You well know of course that there isn't much chance of your column being off-shored - although it would make sense

Could someone on the subcontinent write a column on economics for the Sunday Times? Of course they could, and for a fraction of the salary that you receive. There would also be no requirement to off-shore infrastructure or similar as in other businesses

But of course this won't ever happen

Like all neo-liberal propagandists, you talk the talk because you know you'll never have to walk the walk

Posted by: Hugh at July 27, 2004 10:27 AM

From your article I take it you are pro-offshoring.

I believe that the UK will be financially richer through offshoring with the following caveats:

- There will be many people unemployed in the UK within the next five year
- The rich will be richer and more powerful.

Posted by: Nick at January 13, 2005 10:32 PM
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