Monday, August 03, 2009

Learning From The Geddes Axe

The past is not such a different country

[Sorry - this post has got quite long... but Tyler finds it interesting]

You will have heard of the Geddes Axe - it was the spending axe that got spending axes a bad name.

According to Reform's Nick Bosanquet (excellent piece here):

"The story of the Geddes Axe gives a very definite lesson on how not to change course on public expenditure...

...The episode demonstrates that any plans for public expenditure need to take account of longer term economic effects. The issue of waste proved ephemeral; more permanent in its impact was the abolition of secondary education for poorer children...

...For today the lesson is that the argument from waste is not enough. A viable programme for reductions has to meet tests of economic logic and of equity."

So what was this axe and why is it seen as such a disaster?

Sir Eric Geddes was one of the goat-style businessman drafted into the WW1 government by the arch-goat, the loathsome and corrupt David Lloyd George. Though not an MP, he stayed on in LG's coalition government after the War.

By 1921, government finances had collapsed. As the archetypal big government politico, LG had not only failed to cut post-War military spending quickly enough, he'd ramped up social spending, including his famous homes fit for heroes. But revenues were plummeting as the post-War mini-boom turned out to be no more sustainable than Gordon Brown's nomoreboomnbust.

And we should note some other scary parallels with our current situation*:

  • over the space of a decade, government spending had ratcheted up by around 10% of GDP (the comparable figure today is - yup - 10%);
  • tax rates had ballooned - the standard rate of income tax had gone up sixfold over the decade (to 3o pence in the pound), and the number paying it had nearly quadrupled (cf the vast increase in the number of top-rate taxpayers under Labour);
  • government debt had increased fivefold to about 130% of GDP (counted correctly that's about where ours is now)
  • debt interest costs had soared to around 6% of GDP (ours is officially projected to reach 3% next year, and growing fast)
Clearly the situation in 1921 called for decisive action. Spending was too high, debt had to be cut, and the government needed to show some leadership.

But in 1921, the country was still being ruled by LG's weak, exhausted, and morally bankrupt Lib-Con coalition. They'd already prevaricated over spending cuts for two years, and they simply weren't up to the task.

Not that there wasn't pressure. Inside the corridors of power, they were being pressed by the Treasury - still in those pre-Keynesian days run by sound finance people - telling them they'd run out of road, and that they had to cut spending by 20% soonest.

Much worse, outside the corridors, they faced an actual real life taxpayer revolt.
Yes, fed up with massive tax rises, massive government waste, and a government that seemed more intent on saving their own skins rather than saving the country (sound familiar?), taxpayers had formed a new political movement - the Anti-Waste League.

Spearheaded by disgruntled Tory activists, and backed by press baron Lord Rothermere (with Northcliffe soon jumping on the band wagon), they put up candidates in parliamentary by-elections. Not only that, they actually won - three by-elections in the first half of 1921.

LG and his inner circle panicked. While he'd squared off the Tory front bench with generous dollops of patronage and preferment, rattled Tory backbenchers were now threatening to bring him down (their actual rebellion came just a year later in 1922).

What could he do?

Naturally his first move was to shaft one of his oldest and most loyal supporters - the Health Minister - blaming the problems on him for overspending.

When that didn't work, he tried doing just some of the Treasury's recommended cuts.

And then finally, when that didn't work either, he did what any self-respecting politico would do - he looked around for someone else to take the heat.

Enter Sir Eric.

He was appointed to chair the Committee on National Expenditure, charged with identifying a package of large, specific, and immediate spending cuts. And in an unprecedented arrangement, the Committee comprised not elected Westminster politicos, but five unelected businessmen.

So why did the cabinet agree to surrender their power like that? The National Archive has a fascinating collection of online cabinet minutes which document just how LG bounced them into it (see this minute especially). He told them they couldn't manage on their own and needed outside help:

"The Cabinet were reminded of the overwhelming pressure of departmental work on Ministers, which rendered it extremely difficult for them to undertake extra departmental work or even to give as much time as they would wish to their parliamentary duties, much less themselves to undertake a detailed enquiry of this kind.

The fact was recalled that the appeals made by the Prime Minister and the Cabinet Finance Committee during the last two years had produced comparatively meagre result.

The Prime Minister himself, in the present overwhelming pressure of public affairs, could not possibly devote his personal attention to the details of departmental expenditure. The same was true of the Lord Privy Seal and the Chancellor of the Exchequer. Other Ministers urgently needed a holiday and could not possibly devote their vacation to this task.

Moreover, the delicate position of a Minister at the head of one spending Department criticising a Minister at the head of another was indicated.

Hence, the choice really lay between the Committee now proposed and no proper inquiry at all."

Even for a secret document, thse minutes are pretty frank about the way that government really works: cabinet ministers far too busy with minutiae to tackle the Big Important Issues, the Prime Minister under too much pressure to think, nobody prepared to debate openly with colleagues, everybody reckoning their holidays more important than saving the country (thank God that couldn't happen today).

The obvious question is what was the point of the cabinet? If they were going to hand over the tough decisions to a bunch of "independent experts", why bother with them? (Although in fairness we should note that one cabinet member did vote against appointing the committee - a certain WS Churchill).

The Committee itself most decidedly did not shirk its duty. As this IFS summary notes:

"The committee proposed £87m of extra cuts. Departments did not quite reach the ambitious Geddes Axe target, but central government (current) spending fell by about 25 per cent (this percentage of current public spending is roughly £100 billion in today's terms) between 1920 and 1925."

And although some of these cuts were offset by a rise in local authority spending, initially at least, the net reduction was still substantial:

(Click on image to enlarge)

So given that hefty cuts had to be made, and were made, why has the Geddes Axe acquired such a bad name?

Bosanquet highlights the fact that the cuts were a kneejerk reaction to a political crisis, they were not thought through, and they had damaging long-term consequences.

In particular, cutting spending on schools can't have been in the long-term economic interests of the country. A judgement that is reinforced by the Geddes Report's comments on schooling for average working class kids, which sound appalling to the modern ear: 'children whose mental capabilities do not justify higher education [by which was meant secondary education to age 14] are receiving it' (and see this stinging contemporary critique by RH Tawney).

Accepting that there's truth in that, what conclusion should we draw for the cuts Cam and Oz will need to make.

First, it would be best for them to work out what they're going to cut now - before they come to office and while they've still got time to think though the longer-term consequences.

Second, once they get in, there can be no faffing around - they cannot afford two years of prevarication any more than LG's government could. They need to get on the front foot and do the job in their very first budget next June.

And finally, if they fail to deliver, there's always the option of a taxpayer revolt.

*Footnote - all historic figures taken from The Cambridge Economic History of Modern Britain, Vol 2, Chapter 17.

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