The economic debate of recent weeks has centred around the credit crunch and the changing times of Northern Rock. The Liberal Democrats have shown leadership with Vince Cable’s well-respected comments on the nationalisation issue.
This week, the focus will shift to the Government’s plans for fiscal policy for the coming years. In Wednesday’s Budget, the Chancellor has the opportunity to set out a new model for government spending, based on long term sustainable public spending policies. If he does not take it, he will leave the field open for the Opposition parties, and the Liberal Democrats could capitalise on their recent successful economic commentary.
A new report published today by the independent think tank Reform argues that the programme of public sector expansion begun in April 1999 – the largest and longest spending increase of the last 35 years – has been unsuccessful on all fronts. It has failed to achieve its stated aims, it has restricted rather than boosted economic growth, and it has left the UK ill-placed to face the challenges of the coming years.
The Government has justified its programme of spending increases on the grounds that it would transform public services and boost the UK’s productivity (the celebrated post neoclassical endogenous growth theory), but these aims have not been realised. The scale of spending increases and the absence of reform means that they have acted as a flash flood rather than the planned irrigation that was needed. Entrepreneurial activity, business start ups and private spending on research and development have all declined over the period.
The picture of strong economic growth during this period is misleading. The report shows that 29% of GDP growth from 1999 to 2006 has been generated by public sector expansion. And while the UK has been increasing levels of public spending and borrowing – its ‘fiscal footprint’ – competitor countries have been moving towards fiscal consolidation. Government spending is now well above the average for OECD countries, the budget deficit is amongst the largest in the OECD and the UK has moved from having the fourth lowest gross public debt in the Euro 19 Area to the ninth. The UK has missed out on the opportunity given by a period of benign global economic conditions to reduce its fiscal footprint and taxation has risen to fund this. The UK is therefore no longer a leading low-tax economy and its competitive position in the global economy has declined.
As a result the UK Government and the wider UK political debate now need a change of attitude as well as policy. Above all, there is a need to move beyond the Pavlovian reflex of committing more public money whereever there is a problem. We commend the words of the Cabinet Secretary, Sir Gus O’Donnell, who in a recent speech called on the UK Government to start “to do more with less”. Partly this is realism – in a globalised world it will be increasingly hard for governments to raise taxes. And partly it is optimism – greater productivity in the public sector will enable reductions in the tax burden, increasing incentives to work and save and making the UK a more attractive business environment.
Over recent years the Liberal Democrats have moved decisively in this direction. Higher tax policies have been passed over. In his first major speech on the economy, last month, Nick Clegg went so far as to say that controlling public spending is his “top priority”, and to say that “improving public services … means focusing on “how”, not “how much”. At a time of economic change, when all parties are reviewing their positions, these ideas are a strong foundation for the Party to become the most authoritative advocate of a sustainable fiscal policy for the UK’s future.
* Elizabeth Truss is Reform’s Deputy Director and Lucy Parsons is Reform’s Economics Research Officer. A Lost Decade: Counting the opportunity cost of public spending 1999-2008 is available here.
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19 Comments
Great piece. More of the same would be very welcome.
Good to see a think tank posting on here… Centre Forum take note…
Absolutely agree. The “Pavlovian reflex of committing more public money wherever there is a problem” (and also wherever tabloid leader-writers have said “something must be done”) has been deeply damaging.
Govt must learn to do more with less year by year just as every business has to. Among other things, this means being very selective about iniatives and considering ‘doability’ from the outset.
I agree with the other commenters that this is a welcome posting. I would say, however, that it betrays a poverty of ambition to speak of “controlling” public spending. We need to be thinking in terms of cutting it, and of decisively rolling back the state.
I’d like to put a case for the other side though: when New Labour was elected we had had 18 years (more, if you count the fag end of the previous Labour Government) of sustained propaganda against public spending so that taxation was widely perceived as being the theft of what was rightfully the individual’s rather than being the price of admission to a civilised society. One of the main arguments many in the Liberal Democrats had with New Labour in its first term was that for the first three years Gordon Brown stuck to spending plans he had inherited from the Tories rather than making a vigorous case for the necessity of changing attitudes to taxation. In fact public attitudes, probably up to the Iraq war, have tended to be favourably disposed towards the re-building of the country’s social infrastructure after the depradations of the Thatcher years, and despite a groundswell against ‘stealth’ taxation it has not been until the third term, when it has become abundantly clear that the money thrown at public services has achieved far less than it should have done, that public opinion has started to move back towards hostility to taxation.
Tony Hill
I’m not sure you’ve made the case for the other side! Public opinion over tax and spend is not the same as whether it actually works or not. You seem to recognise that it doesn’t work, however, which is good. I don’t really follow your arguments about the “depredations of the Thatcher years”.
What were these?
Well, sure public opinion about tax and spend is not the same as whether it works, but my point was the way in which public opinion has shifted over the past thirty years. The Liberal Party/Liberal Democrats have never followed public opinion but instead have tried to shape a debate. Most of the people posting about economic issues on LibDem Voice seem to me to be in favour of a substantial reduction in state involvement in the social infrastructure of the country. I don’t know how representative that is of opinion in the party at the moment (I have no way of knowing whether people who post under names other than their own are members or supporters of the LibDems anyway), but if the party is moving in that direction then it is a fairly recent change of heart. As far as the depredations of the Thatcher years are concerned: the destruction of social housing; chronic underfunding of the rail system; ditto the health service; ditto the education system; the drastic shift in power from local authorities to Whitehall; the undermining of a public service ethos; the transfer of publicly owned assets into private hands for a fraction of their true worth; the transformation of the universities into the research arms of what little British industry remained by the time she’d finished with it; the overt encouragement of nationalism which (OK, this is my opinion) led to the entrenchment of the sort of yobbery that is endemic in our society today; the destruction of the art schools as places of genuine education – that’ll do for now!
I rather thought you must have meant “underfunding” of state-run industries.
Given that spending on the NHS, for example, increased at rates above inflation throughout the eighties, and given also the fact that the splurge of spending since 1997 has gone to waste, this example of “underfunding” is, in fact, a huge saving to society.
“Destruction of social housing”.? I put it to you that not a single house was destroyed. There was a change of ownership, which lead to a huge improvements in the housing stock, and absolutely no change to the supply of housing. This is a good thing. Why do you, a liberal, think that state-owned housing is desirable? Have you ever lived in a council house?
And similarly, I’m sure you welcome the reduction in state involvement in industry that was brought about by the privatisation programme. Perhaps they could have put higher prices on the shares, but I don’t suppose they wanted to run the risks of a failure to sell them all off. And these were “our” assets anyway. Presumably only statists reckon the extra money would have been better off in government than in private hands.
Privatisation was the most liberal policy adopted by any government for half a century. Don’t knock it.
While I overall welcome the Right to Buy and the subsequent rise of home ownership and breaking up of monolithic council estates, I think Thatcher made a mistake in barring councils from using the revenues to build more.
If people in an area want more social housing and demand it from their local council, it’s hardly the central state’s business to prevent that. Surely one of the pillars of liberalism is reversing the centralisation of state power and bringing power closer to the people.
Some people cannot house themselves. I’d like it if there was a 100% ownership rate, but it looks like more than 80% or so is not attainable. A case can certainly made for housing those who really are too poor to buy in council houses. In building new houses, we can avoid the mistakes of the past by not building vast one-class estates and ignoring tenants.
Apart from the fact that council tenants have more rights than those living under Rachmanite landlords, it is also much cheaper to house them, as the government doesn’t need to make enormous housing benefit payments to the landlord.
Asquith
Is there any evidence that private sector rented accomodation is worse than council housing? The worst slums are all council housing, I would have thought. If this is the case, then you should be arguing for a larger private rental sector.
Yes power should reside closer to the people. In fact, it should reside with the people. Replacing the control of unaccountable Westminster politicians with unaccountable town hall ones is not going to deliver.
Reform’s thoughts and ideas are always worth reading, and their political antennae have improved greatly.
However, their summaries of their latest report on public spending are slipping towards the caricature of “Tax cuts good, public spending bad” Nick Clegg’s summary that the “How” of public spending matters much more than the “How much” is briefer and better pointed.
The Liberal Democrat basic position is that at the margin money is best left to fructify in the hands of the taxpayers unless there is clearly good value to be had from increased public spending. Getting the steady increase in value from public spending that we should expect is a matter for careful, continuous year after year detailed effort – the very reverse of the New Labour and Tory recipes of flinging armfuls of our money at media headline problems; combined with occasional shock “efficiecy drives” which never deliver as promised and which further disorganise the steady effort needed.
Bishop Hill, that is most likely because most council stock has been sold off, and so only the very poorest live in social housing. If councils were freed to build more, and if inhabitants of a certain area elected a council that wanted to build more, that should be an option.
The problem of “sink estates” could be removed if it were made respectable to rent from a council or housing association, and if such properties were no longer concentrated in estates. I’m not saying that should be done on a national scale, just that it should be an option. Many Lib Dem local authorities have done just that.
I reiterate that at least 20% of the population are not going to be able to buy properties. It isn’t realistic to say that they should hold “power”, when they are in no position to do so.
Asquith
I disagree with your analysis of why council housing is worse than privately owned. IMHO this is because the council don’t view it as their property and neither does the tenant. It’s Friedman’s old saw about spending other people’s money on someone else – who gives a stuff about value or price (or maintaining the place).
I also disagree that the poor cannot hold power in this way. Their power is precisely zero if they are a client of local government. How about voucherisation?
I understand what you’re trying to say. But a lot of social housing tenants are long-term ill, single parents, drug addicts or otherwise without a realistic chance of getting jobs. If they are to live at all, the state will have to pay their rent etc. Accordingly, it would end up costing more if they were tenants of private landlords.
Any solution to this would have to be an overall answer to poverty, rather than something that narrowly focuses on housing.
“Accordingly, it would end up costing more if they were tenants of private landlords.”
Why? The state is notoriously inefficient.
Because the landlords, in order to take on welfare dependents as tenants, will have to be offered a full market rent by the state. The landlord’s profit is figured into this. Fairly obvious if you take the “libertarian” blinkers off for long enough 😉
Just going back to the discussion about the privatisation of the utilities by Thatcher: I don’t have the same rosy view of this as Bishop Hill. The serfs got the crumbs (well, I didn’t because I refused to buy from the state what I had already paid for in taxes – more fool me!), but the people who made the real money were Thatcher’s important supporters; the people with plenty of money already; the people in the City on the inside; the people who got the rake off on all the small deals that the rest of us made; the people who ran the companies which sold us endowment mortgages; who swindled us out of our pension funds; who persuaded the tenants in council blocks to buy their unsaleable flats. What happened when the council housing stock was sold? The massive expansion of the private rented sector. And how was that financed? By the introduction of housing benefit which transferred vast sums of money out of the pockets of taxpayers into the pockets of the buy-to-let landlords. None of this is what I recognise as liberalism, even in a classical laissez faire fashion. It is a very clever form of cronyism disguised as spreading wealth and power, and in fact doing exactly the opposite.
Outstanding post, Tony Hill 🙂
Tony
You’ve just moved the goalposts by a huge amount. We were discussing the “depredations of the Thatcher years” and the allegation that Mrs T allegedly ran down public services.
We have agreed that throwing money at state monopolies has been a huge failure. You haven’t disputed that the Thatcher governments funded the NHS at above inflationary rates.
Now your objection seems to have changed to one of “the whole process of privatisation was corrupt”. Can I assume from this that you agree with me that the process was (a) necessary, (b) successful and (c) better than the alternatives, but that you think there was some corruption involved?
If so then I think we are largely in agreement. We want to see further privatisations, but without any corruption. Is this fair?