Sunday, November 13, 2005
How to blow £50 billion without really trying
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

Would the old Gordon Brown, who eschewed carpets in 11 Downing Street in favour of bare floorboards, have gone to the trouble and expense (taxpayers) of shuttling to the Middle East on an economic mission, only to shuttle back immediately (and fruitlessly) for a House of Commons vote? Would the old Brown then have hopped on a plane straight back to Israel?

No. The hairshirt chancellor of Labour’s early days in office would have shunned such stunts, not least because of the cost. But then it is a long time since he has worn that hairshirt.

After a busy week Brown is said to relax by watching recordings of some of the television programmes he missed, particularly football matches. I doubt, however, he set the video for last week’s Dispatches programme on Channel Four.

Presented by Andrew Dilnot, the former director of the Institute for Fiscal Studies, it was a comprehensive indictment of Brown’s period in office. I know Dilnot, and he is a mild-mannered fellow who takes a lot to get riled. But riled he was about Brown.

The government’s problems over administering tax credits were, he says, entirely predictable, indeed when he was at the IFS he had warned the Inland Revenue that “the idea was just ridiculous”.

His conclusion, for a programme that went out before the 9pm watershed, deserved an X-certificate. He said: “Within the month the chancellor will give parliament an update on his budget. Well I’ll do it for him: He’s overspent – an almost £20 billion surplus is now a deficit of more than £30 billion. He’s got his economic forecasts wrong – so there’s less money coming in to cover his spending.

“And he’s managed to keep his own borrowing rules by ingenious accounting methods. Gordon Brown’s had the kind of luck that every Chancellor dreams of and almost none gets. He’s had a strong economy and plenty of money. But eight years on, inequality is higher than ever and the public services aren’t transformed. He’s blown it. He may be the prime minister in waiting but on the basis of his economic performance, is he the one that we want?”

Ouch. Is that fair? Television is always a bit unfair but at a time when Tony Blair is on the rack, it is easy to lose sight of the fact that Brown has also suffered serious reputational damage.

Last month the OECD (Organisation for Economic Co-operation and Development) published its review of the British economy. The Treasury was very pleased with some of its conclusions, most notably its verdict that Britain had achieved “impressive macroeconomic stability”, ranking first among 30 OECD countries over the period 1998-2004 on two key measures. Britain’s inflation volatility was lower than anywhere else, as was the average gap between actual and potential gross domestic product, the “output gap”.

But this year’s slowdown, while a long way from recession, has tarnished even this good macroeconomic record. Ross Walker of Royal Bank of Scotland, predicting just 1.6% growth, notes that we should not confuse stability with other aspects of economic performance. “Britain’s recent macroeconomic performance only looks impressive relative to the sclerotic major euro area economies,” he writes.

The OECD, in addition, was far less complimentary on other issues. Britain ranks badly on productivity, skills, innovation, infrastructure - all the things that contribute, ultimately, to the competitiveness and long-term strength of the economy.

Most of all, Britain continues to rank badly on public services, in spite of the Blair-Brown gamble of pouring in record sums in the expectation of transforming performance. Part of the problem, brought out by Dilnot’s documentary, was that much of the extra money appears to get lost along the way.

Many NHS trusts are in financial deficit and cancelling operations when on the Treasury’s figures, they should be awash with money. Headteachers, accustomed to hearing Brown’s announcements of substantial extra funding, are bemused when it never seems to arrive. Spending on public transport is lower as a percentage of gross domestic product than under Margaret Thatcher.

Brown’s relationship with public services has never been a comfortable one. In Labour’s first 2-3 years, when spending was genuinely kept tight, the impression was often given that the purse strings were being relaxed. When the money eventually did arrive, those who ran public services were suspicious. Add the bureaucratic channels down which cash can disappear, and it is hardly surprising services have not been transformed.

In some respects, perhaps, we do not deserve good public services. Teachers talk of the growing proportion of pupils who don’t want to be taught, and whose parents are not greatly bothered about it. One government ambition for the NHS, set out in the Wanless report, was for voters to become “fully engaged” with keeping healthy.

In fact, we appear to be two nations on this - on one side the gym-using set, obsessed with healthy eating, and on the other side the slobs. Another set of OECD figures, just out, shows that 62% of British adults are overweight or obese, the third highest among 30 advanced countries, and not far behind America on 65.7%. As for smoking, 26% of Britons do it on a daily basis, in line with the OECD average, but significantly more than America’s 18%.

The big reason for the government’s failure on public services, however, was entirely predictable. We discovered long ago that large public sector organisations are incapable of efficient delivery but Blair and Brown chose to ignore it.

Reform, the think tank, has assembled a catalogue of evidence on this. Under Labour public spending has increased by 4.5 percentage points of GDP, easily faster than any other developed country. Public sector employment has risen twice as fast (by 13.2%) as the private sector (5.7%) since 1998. Public sector productivity has, however, fallen.

The fastest rise in public sector jobs has been among administrators and non-frontline staff, up by 66.1% in the NHS since 1998, by 47.1% in education, by 33.6% in the police and by 31.1% in the prison service. The equivalent frontline increases are 24.9% in the NHS, 25.1% in education (teachers and teaching assistants), 11.4% in the police and 2.6% in the prison service. You can’t run services without managers but this seems particularly unbalanced. It is one reason, among many, why we are not getting much “bang for the buck” in improved public services.

One immediate consequence of this is for tax. With the pre-budget report coming up, nerves are getting stretched over tax. Had the public services been transformed, and had the government been in a much stronger position, Brown might have been tempted to put the public finances back in shape with some hefty tax hikes. In the current environment I don’t think he’ll dare.

David Cruickshank, head of the tax practice at Deloitte, expects a widening of the tax base through closing loopholes and even greater disclosure of avoidance schemes, rather than explicit signals of forthcoming tax hikes. I agree with him.

PS France is an enigma. It has the most productive G7 economy, measured by output per hour, alongside high unemployment. The two things are, of course, related. French employers would rather invest in machines than take on workers.

But we shouldn’t assume a straightforward relationship between French unemployment and the riots that began in Paris’s grimmer suburbs. The explanations go deep and have their roots in discrimination and social policy as much as economics. We have always resisted a direct link between unemployment and discontent or crime here, why should it be different in France? The summer 2001 riots in Oldham, Burnley, Bradford and other northern towns came, after all, at a time of fast-falling unemployment.

From The Sunday Times, November 13 2005

Comments

David

You, along with your fellow Times colleagues, are some of the bullish commentators on the UK economy. You are in stark contrast with Larry Elliot of The Guardian. Yet you have written this article largley arguing that the great British economic miracle of the last 8 years has been built on public spending based on consumer and Government debt. This will have to stop... probably slow down in the next 2 years. What will happen after the public spending tap slows down? There are only two ways a country can become richer in the long run: productivity growth and/or exports - neither of which looks like improving.

What will happen after the public spending tap slows down? Will the sandcastle economy not fall when the waves come in?

Posted by: Ash at November 15, 2005 11:13 AM

Pulic sector has grown at an alarming rate thanks to new labour.
This has given the economy a serious imbalance. When this bubble
bursts its going to take more than Mr Bling's men to put it back together again.

Posted by: Frank Smith at November 15, 2005 01:36 PM

In response to Ash's comment - it's a little bit more complicated than you suggest. The successful run for the UK economy (continuous growth, low inflation rising employment), which began four years before New Labour was elected, remains worthy of note. I attribute it to:

1. The Tories' microeconomic reforms of the 1980s.
2, The better macroeconomic management of the 1990s and beyond, including inflation-targeting (since late 1992) and Bank of England independence.

I agree, and have written often, that the economy has been over-dependent on the consumer. As for the public sector, I'm glad to say that even under Labour, private sector employment has grown by more, in absolute terms, than public sector jobs.

But there are problems, not of the bubble-bursting variety, but that when you factor in slower growth in consumer and public spending, the re-regulation of the economy and an abject productivity record, the risk is that our performance going forward may not be much better than our sclerotic European neighbours.

Posted by: David Smith at November 15, 2005 02:44 PM

David, I think you have a point about the last 8 years being - partly - the fruits of the structural/supply side reforms of the Conservative governments (I am left of centre).

When you say that private sector jobs have expanded at a faster rate than public sector jobs...is it not likley that while the private sector jobs have been low paid and largley unsustainable retail and construction jobs - as in America - the public sector ones have been the more high paying jobs (£40-50K bureaucratic management jobs).

I am really keen to pin you down on this. You are saying there is no significant bubble and so there will be no bubble bursting....but the next 5 years might see far less rosy times....possibly with an ever increasing current account budget deficit going to the levels of the Americans; further higher taxes; and some increases in unemployment?

I suppose PBR will give some indications of what lies ahead.

Posted by: Ash at November 15, 2005 04:17 PM

David,

What I think you're missing when you say that private sector jobs have grown by more than public sector jobs under New Labour, is that many (perhaps most) of these private sector jobs only exist because of increased public sector activity. That is either supplying the public sector directly, or complying with increased tax complexity, regulations, etc.

Look on any jobs website and you will see the preponderence of jobs selling pharmaceuticals to the NHS, tax accountancy, etc. Every public sector worker requires office space, a desk, software, etc., thus making business good for those companies that supply these things. I am convinced that the part of the economy that does not have the public sector as a customer or work creator has shrunk massively. I know from my own experience in the electronics industry that every job vacancy attracts dozens, if not hundreds, of well qualified applicants - so much for science and engineering skills shortages that we keep hearing about.

This must all end in tears, surely, as the money runs out.

Posted by: HJ at November 16, 2005 12:32 PM

i read you articles quite often and you are pretty not far off the mark there is a recession as i work in the manufacturing side of the economy work is slack especially in plastics we have all seen the sales on tv &the lack of confidence in the high street every day some bussiness is squealing and many bankruptinces doesnt that show something about the economy ?so there where has all that 700m
from the nhs gone to ? as i was made redundant last august 04
ifound jobs were there there not there today are they?its just that the government wont admit that there is a recession on for if they did the economy would just collapse even further with the cost of living so frightening can you blame many brits leave this blair land?for 7 out of 10 recon that the grass is greener on the other side they all cant be wrong can they?one more question if gordon becomes pm who is have his old job ? some ones got to clean this mess up havent they? latley gb has blamed everyone else for his mess and certianly not himself how history repeats its self in many ways the buck stops where?.... thats another fine mess you got us into!

Posted by: john musty at November 17, 2005 04:52 PM