Monday, February 25, 2013

So How Are Those Cuts Coming Along?


Are we quite sure these things work?

When we left on our two year sabbatical at the start of 2011, public spending was running at an annual rate of £700bn (Total Managed Expenditure). Now we're back and the most recent official figures say it's running at £674bn (2012-13). So that's a cut of around £25bn in just two years. Fantastic!

Hmm... given what we know about previous cuts programmes, that actually sounds a bit too fantastic. Perhaps we should lift the bonnet and check the underlying figures...

Ah... now we can see. It turns out that the official spending figure of £674bn is net of a £28bn inward transfer of assets from the Post Office pension fund. Removing that bit of jiggery-pokery, we discover that underlying spending is actually up. Moreover, if it hadn't been for a big fall in investment, the increase in overall spending would have been getting on for £20bn. Two days back, and we're already reminded never to take official headline numbers at face value.

Looking forward from here, the most recent projection from the Office for Budget Responsibility (OBR) has spending continuing to rise, reaching £745bn by the time of the next election. So despite the talk, that's continued growth throughout the Parliament. Two years on, and we seem to be stuck in the same old place.

Yes, of course, we ought to adjust for inflation. But even when we do that, the planned cuts look more like a scratch compared to the huge Labour spending splurge they're supposed to be addressing. Here's the OBR's five year projection spliced on to the back history:



True, spending is down a bit from its peak between 2008 and 2010, but that simply reflects the completion of Crash related emergency capital spending. From here on, overall spending stays flat in real terms right through to the election. It's the next government that's meant to get the line heading down again. Cuts, what cuts?

What the coalition is actually doing is to cap, not cut. The idea is that by holding the line on spending it will allow time for economic growth to do its magic work and boost tax revenues. The public finances will eventually rebalance as revenue catches up with spending.

Which is a great idea if you can somehow get some growth. In fact, it's pretty well what the Thatcher government did during the 1980s. They never did manage to cut spending - as we can see from the chart - but they did sit on it for a prolonged period. And in their case, they did manage to get some growth going again so tax revenues grew strongly.

Now, just remind me - how did they get that growth again? Wasn't there something about slashing tax rates and breaking up public sector monopolies?

Next month George presents his third budget. He's already taken steps to cut taxes on enterprise and effort, but the clock is ticking louder now. We need to see more tax cuts.

Spending? Well, as we argue in the book, tinkering around at the margins isn't going to do it. We need full-blooded structural reform to both public services and welfare entitlements. We'll be taking a closer look at both over coming weeks.

PS Many thanks to all of you who've welcomed me back to the blogosphere. Quite a few of my must-read blogs - such as the good Doc Crippen - have disappeared over the last couple of years, which is a sad loss. Yes, it is a commitment, and yes, it can eat time, but blogging is still a great way to share ideas, and for those of us beyond the Westminster bubble it is a way of contributing to a wider debate.

4 comments:

  1. Welcome back, the UK needs you.

    ReplyDelete
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  3. Anonymous12:52 pm

    Neil Record says that the NHS pension is worth 60% of salary

    ReplyDelete
  4. According to Sydenham's Law any reduction in the rate of public spending should stimulate the economy. There is an inverse relationship between increasing public spending and private sector growth. Even holding spending growth steady is beneficial. There are some charts at Sydenham's Law of public expenditure and economic growth. The real history trumps any theories and models.

    ReplyDelete