Sunday, January 11, 2015
Why politicians struggle to even trim the size of the state
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.

It may already be too late, given that the election campaign is already in full swing and the claims and counter claims about the public finances and public services will be flying thick and fast for many weeks to come. If you are not confused now, you very soon will be.

But, just in case there is still time to offer some context, let me attempt to do so. All of my figures come from the independent Office for Budget Responsibility. Some of them may surprise you.

Let me start with the numbers for overall government spending, total managed expenditure. George Osborne is accused of wanting to take Britain back tom the 1930s, while the Tories, for their part, say Labour would take us back to the fiscal irresponsibility of the Blair-Brown era.

In inflation-adjusted terms, 2013-14 prices, there was a massive increase in total managed expenditure over the 2000-2010 period. Spending in real terms in 2009-10, £737.3bn, was 51% higher than it was in 1999-2000, £488.5bn.
Think about that for a second. In a decade, the size of the state increased by just over a half. It was the biggest sustained increase in public spending in British history.

Some may say that the comparison is unfair, because spending was skewed sharply higher at the end of the period by the economy’s dive into crisis and recession. That, however, is not true. The increase in spending in the last 2-3 years was not out of line with its average in the rest of the 2000s. The rise in spending was overwhelmingly deliberate.

Now, using those same OBR figures, updated following last month’s autumn statement, what is in prospect? This is what might surprise you. Osborne’s overall aim over the 10 years 2010-2020 is to reduce total managed expenditure from £737.3bn in 2009-10, again in real terms, to £703.7bn in 2019-20. That is a reduction of 4.6% over 10 years, less than a single year’s increase during the splurge years.

How much of this has already been done? Slightly more than half. Total managed expenditure in 2013-14, £719.9bn, was 2.4% down on its 2009-10 level.

That is also broadly the message from the deficit numbers. There has been a slightly odd debate about whether the budget deficit has halved or not. As far as most economists are concerned, it has, public sector net borrowing having fallen from 10.2% of gross domestic product in 2009-10 to an estimated 5% of GDP this year. Adjusted for the cycle, it has dropped from 8.1% to 4.2% of GDP. So we are halfway there to eliminating the deficit, or slightly less than half to meet Osborne’s ambition of running a budget surplus of 1% of GDP

What would happen under Labour to overall spending? Nobody in British politics has a copyright on fiscal credibility but Labour has more work to do to convince voters after leaving office with a record peacetime budget deficit. Its softer ambition of just eliminating the so-called current budget deficit, in other words continuing to borrow to invest, would allow it a real level of public spending some £45bn higher than the Tories in 2019-20.

That is quite a big difference, though it does not mark a return to the years of irresponsible plenty. Total spending in real terms would be about 4% higher than now, compared with 2% lower under the Tories.

Why, if the numbers suggest either a modest real cut in overall spending – to take it back to 2007 levels - or a small increase under Labour, is the air so thick with talk of savage cuts, of a return to the 1930s? Why are NHS accident and emergency departments creaking so badly, just a few years after the health service – which did disproportionately well in the Blair-Brown era – received a near-doubling of real resources?

The answer, and it is a depressing one, is in three parts. The first is that, for the most part, once government spending is spent, it is spent, gone for ever.
Gordon Brown used to talk about investment in public services but the overwhelming majority is here today, gone tomorrow. You can talk about infrastructure spending and, perhaps, investment in education. But, even in health, where it should, spending more now does not spend you can spend less tomorrow.

In fact, and this is my second point, spending more now means you probably need to spend at least as much tomorrow. Public spending is subject to a ratchet effect. Once it has been increased, to whatever level, it becomes curiously hard to cut. New entitlements quickly become established provisions, over which fierce battles are fought. Increasing spending is the easiest thing in the world for any politician, cutting it much harder.

The third reason is that, perhaps because of this, politicians do not like to cut. Osborne has got a reputation as the most savage wielder of the axe since Margaret Thatcher was in office, despite the fact that day-to-day spending has not been cut. There was remarkable unity between Labour and the Conservatives on cutting public capital spending – government investment – the coalition ran with the plans it inherited from Labour.

But public sector current spending is in real terms a little (1%) higher than its 2009-10 level, and has been flat over the past 3-4 years. On the assumption that public investment will not be cut further, day-to-day spending has to take the strain.

I should say that even a steady level of current spending has required spending cuts – deep for local government and some departments and mainly without an adverse effect on services – because debt interest has risen by around £20bn and welfare spending is up.

Even so, the fundamental question remains. Why is it so easy to increase government spending, even enormously as happened in the 2000s, and so hard to cut it?

My e-mail inbox is not necessarily typical of the population as a whole, but a constant theme of it is that people are uncomfortable with high and rising government debt, currently £1,457bn, and want to see it reduced. Treasury projections in the autumn statement suggested that you could only get debt back to 40% of GDP in a reasonable timeframe (it is currently 79.5%) and reduce it in cash terms by running the kind of budget surplus (1% of GDP - if it is not used for tax cuts) Osborne has as his ambition.

If there is an appetite for reducing government debt, is there one for cutting public spending, even relatively modestly in overall terms? I am not sure. People tend to approve cuts except when they affect them. The problems in the NHS are a walking advertisement for more public spending. Amid the dossiers of uncosted spending commitments and claims of a return to the 1930s, you will struggle to find a sensible debate on spending in the coming months.

We need such a debate, over what the priorities should be for spending and how non-priority areas can be cut back. Without it, the public finances will never be properly repaired and we will lurch from one crisis to the next. It can be done. The question is whether it will be.