Sunday, February 17, 2019
How to end austerity without breaking the bank
Posted by David Smith at 09:51 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Theresa May, by all accounts, is promising to splash the cash to deserving causes like some modern-day Lady Bountiful. Labour MPs in leave-supporting constituencies who support her withdrawal agreement are being promised more money, as are businesses kicking up about the consequences of a no-deal Brexit.

The government has already allocated more than £4bn for Brexit preparations, most but not all for getting ready for no-deal. Though some of that no-deal spending would have happened anyway, and there will be few examples quite as bad as the transport secretary Chris Grayling’s phantom cross-channel ferries, money is being spent.

The civil service, creaking under the strain of leaving the EU, is growing in size. After years of cuts in numbers, and a low of 416,000 in the second half of 2016, the home civil service had added about 20,000 extra people by September last year, and has been busy recruiting more over the winter.

The additional spending comes on top of the prime minister’s insistence on a generous 70th birthday settlement for the National Health Service. Its spending will be £20.5bn higher in England in real terms by 2023-24. Add in Scotland, Wales and Northern Ireland and you get to about £25bn.

The House of Commons Treasury committee, reporting last week on the fiscal impact of that NHS birthday gift, together with other measures last autumn which included an earlier than expected raising of tax allowances, declared that the government’s stated objective of eventually balancing the budget “now has no credibility, so cannot be used by parliament to hold the government to account”.

The objective of balancing the budget, ever, seems to have turned into a dead parrot. It has ceased to be. Somewhere in the depths of the Treasury you imagine Philip Hammond, his reputation as the most fiscally conservative chancellor on the line, head in hands and quietly weeping.

He would see it differently and that, without his resistance, the spending increases and tax cuts would have had to be much larger, and the prospective hole in the public finances much bigger. After him, he might say, comes the deluge.

The pressure, however, persists. This will be a big year for public spending, and not just because of Brexit. The Treasury is due to hold a comprehensive spending review and Liz Truss, the chief secretary, will soon give a speech setting out the priorities for it. The review is not definite; there are Brexit-related circumstances in which it might not happen, but it is planned.

The challenge is quite straightforward. As things stand, the NHS is getting plenty but most other parts of government are still in austerity mode. The NHS accounted for 11% of all spending on public services in the mid-1950s, 23% by 2000, 29% by 2010 and, on present plans, will be 38% of all spending by the 2023-24. That looks dangerously unbalanced.

A very good briefing note from the Institute for Fiscal Studies on the outlook for the spending review, by Carl Emmerson, Thomas Pope and Ben Zaranko, sets out the parameters. A normal spending review covers the next 3-4 years, though the IFS opens up the possibility this time of a one-year review, given that the uncertainty may not have lifted even by the time of this autumn’s budget.

It is not clear how much we will learn about it when the chancellor delivers his spring statement in less than a month’s time, on March 13. I suspect very little. The “spending envelope”, the amount in overall terms that the government intends to spend over the next few years, had at one time been expected in last autumn budget.

But that budget, held unusually early in October to clear the decks in November for parliamentary approval of the prime minister’s EU withdrawal agreement – and we know what happened to that – only really told us what will be happening to NHS spending. Will we see the envelope next month, so that we know what everybody else is getting?

Almost certainly not. The talk is of a “stripped down” spring statement consisting of a new official forecast, which itself will be subject to the uncertainty of how many of the known unknowns about Brexit have been resolved. The Brexit fog, to coin a phrase, will also provide the chancellor with a good excuse not to set out the spending parameters. Though the Commons Treasury committee was also sceptical about a “deal dividend” for the economy and public spending from an orderly Brexit, Hammond will not want to concede that point.

The question is what he should be doing in the spending review to meet his and the prime minister’s claim that “austerity is ending”, which is politically necessary, without damaging the public finances. Though people are often sceptical of whether “cuts” have occurred, it is clear that they have. The long-term trend is for public spending to rise. In the past decade it has fallen, by about £40bn in real terms. The hardest hit departments, which include the Ministry of Justice and the Department for Environment, Food and Rural Affairs have seen real cuts of some 40%. Local government has also seen very large cuts.

Here, the picture is rather more reassuring for the Treasury than might be thought. One aspect of austerity, the four-year cash freeze on most working-age benefits imposed by George Osborne, will come to an end in the 2019-20 fiscal year. Projections for the public finances assume that the freeze will be followed by inflation-linked increases in these benefits.

Ending austerity by stopping further cuts for departmental budgets is, meanwhile, not as expensive a proposition as you might think. The IFS calculates that avoiding real cuts for unprotected departments would cost just £2.2bn of extra real spending by 2023-24. Ending those cuts on a per capita basis would cost only £5bn. That is almost small change for a government that expects to spend not far short of £1,000bn – a trillion – by 2023-24. The public finances are healthier; the current budget deficit (on day-to-day spending) has been eliminated and the overall budget deficit is back down to pre-crisis levels.

But there is a limit. Money handed out in haste, as the prime minister appears to be promising, is almost certain to be badly spent. Britain’s neglected regions need the public investment that will bring much-needed economic regeneration, not short-term sticking plasters. Bungs are not a good basis for spending.

Any spending largesse this year also has to be measured. While the public finances have been transformed since the financial crisis, they face a renewed risk in coming years from the ageing population and the upward pressure that will put on spending on pensions, health and other areas. The Treasury will be accused of being mean-spirited in this year’s spending review but that is its job, and there is a reason for it.