Sunday, October 07, 2012
Public spending is too important to be left to politicians
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

George Osborne’s third speech tom the Tory conference as chancellor, this week, is probably his stickiest. In 2010, the coalition was in the first flush of optimism. The first of the four quarterly falls in gross domestic product on its watch was yet to come.

Last year was a little less comfortable but it came before the Office for National Statistics (ONS) gave us the double-dip recession.

This year’s is too early for the ONS to tell us whether there was growth in the third quarter - if not with favourable post-Jubilee and Olympic effects we might as well give up now - that will come on October 25.

But the backdrop remains a subdued one. Business surveys suggest some of the strength we have seen in the labour market may be subsiding. Purchasing managers’ surveys for manufacturing, construction and services averaged 51.1 in the third quarter, above the 50 dividing line between growth and recession but only just.

Some bits of the economy are doing well. New car registrations last month, the first for the new “62” plate, were 8.2% up on a year earlier, with sales to private buyers up 14.2%. Overall, though, this is an economy still in serious need of some oomph.

The most difficult area for Osborne is his fiscal strategy. No doubt we will hear a lot about “dealing with the debt” from ministers, when they should be saying “dealing with the deficit”.

But even dealing with the deficit is in trouble this year after a successful first two years, as discussed last week. Depending on how you measure it, borrowing is between a fifth and quarter up on last year. The fiscal strategy is in need of rebooting.

Some will say the coalition is suffering the inevitable economic consequences of trying to cut the deficit too quickly. Paul Krugman, the Nobel-winning American economist, will be over here to make that point again later this month.

I think the problem is rather a different one, and it goes back to the coalition’s early, over-confident days in the spring and summer of 2010. We had an inexperienced Treasury chief secretary - Danny Alexander only got the job when David Laws was forced to resign - and a spending review Osborne insisted was completed in time for its mid-October unveiling.

The result was an exercise intended to set the tone and the fiscal parameters for the parliament was a dog’s breakfast, hurriedly cobbled together. We have had, and continue to have, the wrong kind of cuts and the wrong kind of spending increases.

Handed a “there’s no money left” poisoned chalice by Labour and a sketch, no more, of a spending review in which the only thing slashed was capital spending - infrastructure - the coalition was silly enough to run with it.

Brian Reading, the economist, has deconstructed the errors made in a paper for Lombard Street Research, The Blunt Axe. I can do no better than sum up his main criticisms of that 2010 review.

As he writes: “Its claim to secure economic stability was made without any attempt to assess the growth consequences of spending cuts. It hid behind the fan of the OBR’s [Office for Budget Responsibility] rosy forecasts that had little regard for the uncertainty in the global economy.

“It slashed and burnt investment except on expensive prestige projects; It made no attempt realistically to identify where taxpayers’ money was to be saved.

“It made no to attempt to measure the real resources provided to its priorities, using bogus price deflators. It failed to protect front-line workers, identify them or determine what front line work they did. It made no plans for the inevitable cuts in government employment, delegating responsibility to public sector employers.”

The most egregious errors were on public investment and unemployment. Government investment has the highest “multiplier” of any fiscal action by government. Every pound spent results in at least a pound extra gross domestic product. Yet the government planned a 58% cut in public sector net investment by 2014-15.

Public sector employment, meanwhile, has fallen 300,000 more than the OBR said, mainly because the coalition’s aim, of holding down public sector pay, failed. Instead of rising just 3% since the election, average public sector pay has risen by 9%, Reading calculates. Jobs took the strain.

The problems persist. So far this fiscal year, benefit spending is 6.5% up on last, as a result of the decision to index most benefits by 5% in April. Where’s the axe there?

What should be done? Reading is clear and I agree with him. Politicians of all parties cannot be trusted to make the right decisions on spending and neither can Whitehall officials (his paper was written before the West Coast main line fiasco).

The most effective exercises in cutting public spending in the past, he points out, have been when governments got somebody in to do it. So the Liberals in the 1920s asked the businessman Sir Eric Geddes to advice on cuts, the Geddes axe.

In 1931 Sir George May, on his retirement as secretary of the Prudential, headed a committee to advise Labour, and then the coalition national government, on a programme of cuts. In 1976-7 the International Monetary Fund which oversaw cuts. We have learned a lot since those exercises. Public expenditure is still significantly too large in relation to the economy’s sustainable tax base, hence the deficit.

But we cannot afford another disaster like 2010’s spending review. Future cuts need to be planned in a way that has the minimum impact on growth and front-line services and enhances, not diminishes, Britain’s ability to grow in future.

So the next spending review, in 2013, needs to be overseen by an outside committee of experts, under a strong leader independent of politics. “A fresh start is urgently needed right now,” Reading writes. “A Geddes-style independent committee should be immediately established.” Indeed. Spending is too important to be left to politicians.