It is simply not true – as our critics on the left pretend – that we are slashing and burning the state. By the end of this Parliament, public spending will still be 42% of GDP. That’s higher than at any time between 1995 and when the banks crashed, in 2008.
Nick Clegg, 10th March 2013
It’s a soothing line from Nick Clegg, designed to reassure Lib Dems that the Coalition’s austerity programme is simply curbing the spending excess of the Blair/Brown years.
However, as Steven Toft (AKA Comment Award-winning blogger, Flip Chart Rick) highlights here, the reality isn’t quite as soothing. The reality is that spending on day-to-day public services is being cut by a quite massive amount.
The reasons are partly demographic (an ageing population is putting a lot more strain on pensions, benefits and spending on health and social care) and partly economic (the weak labour market means lower tax revenues and higher social security payments): “The result of this increased pressure on public finances is a shift in state spending away from public services and towards welfare and debt repayments.”
And here’s what it means for day-to-day spending on public services:
According to the government’s plans, then, while overall public spending reduces by 3.9 percent between 2010-11 and 2018-19, per capita day-to-day spending on public services falls by around 28 percent over the same period. Economic and demographic pressures on public finances translate what looks like a relatively modest cut into a very big one. …
It is unlikely that health or education spending will reduce significantly, given the pressures on both. The IFS reckons that the NHS needs a real-terms increase on 1.2 percent per year just to keep pace with demographic change. Even with its protected budget, therefore, the service is beginning to struggle.
The result of all this is some pretty big cuts to most other departments. According to the IFS, the implication of protecting health and education is that cuts to other areas of spending will need to average 36.6 percent. This will hit local government particularly hard.
It will need someone with more time than me to dig out the data and work out when a government last spent as little as £3,899 per head, at today’s prices, on day-to-day public services. My guess, just looking at the IFS graphs, is that it must have been some time in the 1990s, when we had a much younger society placing less demand on services like health and social care.
It’s well worth reading Steven Toft’s post – Is the state shrinking? – in full.
And for Lib Dems then to reflect whether pledging to increase the personal allowance threshold to £12,500 at an estimated cost of £5 billion per year in 2014–15 prices is a responsible manifesto pledge for a progressive party.
* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.
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24 Comments
Raising the personal allowance threshold to £12,500 will allow taxpayers to keep £5 billion per year to spend on their priorities rather than the state’s priorities. That seems a fundamentally liberal thing to do.
I think you need to be clearer here, Stephen, what you mean by “day to day” public spending.
It appears to be the case that you have chosen to show one category of spending – departmental spending – that is going down, as AME is going up, giving a total that is as Nick describes it.
I could just as easily publish a graph of AME and talk about public spending going up.
The important question it seem to me, is whether something can be done about the pressure on AME (which is largely welfare and interest on the national debt) – beyond the obvious options of a) slashing welfare, and b) cutting the deficit more quickly.
Here’s a useful primer:
https://www.gov.uk/government/publications/how-to-understand-public-sector-spending/how-to-understand-public-sector-spending
@ Guido Fawkes – I’m not against the policy. There are very good (and, yes, liberal) reasons for saying the state shouldn’t tax people earning the minimum wage. But politics is about choosing between priorities and I question this tax-cut being a priority at this time.
@ Joe Otten – Steven Toft’s post goes into the detail there which is why it’s worth reading it in full. I’m not questioning Nick’s accuracy – I am questioning the “these cuts aren’t really real” implication of his statement.
Stephen,
I think relying on significant further cuts to local government funding is going to be particularly problematical for the same demographic reasons that your article discusses. The most recent Barnet Graph of Doom indicates that adult and children services will absorb 100% of the councils projected income by the end of the decade – leaving no funds available for other council services such as refuse collection/recycling, libraries etc.
I think the focus of cuts in the next parliament will be on welfare (excluding pensions), most probably housing benefit and tax credits. For that reason, I would advocate consideration of delivering the benefit of the proposed personal allowance of £12,500 as a tax credit to all (in place of both the personal allowance and most existing benefits ) i.e. Milton Friedman’s negative tax proposal.
Joe Otten’s point about interest on the national debt is worth thinking about – the historical approach has been to let inflation take care of the problem over a couple of decades. With the introduction of Quantative easing – we now have a situation where the Bank of England is repaying the interest it earns on roughly 1/3rd of government bonds in issue to the exchequer i.e. interest on this debt doesn’t get paid to anyone outside the government. and is effectively monetised.
Nick Clegg is absolutely right that overall spending is not being cut and Steven Toft is right that spending on public services is being cut, as a consequence of rising welfare and interest payments.
If only the deficit hadn’t rocketed under Labour and they’s reformed welfare much earlier that wouldn’t now be the case.
I think what Nick Clegg was arguing was that there is no ideological commitment to shrink the size of the state, but that policy is being driven by dealing with the economic situation.
Joe, that’s an interesting point. It is the kind of behaviour that in good times would see a country’s credit rating hit and cost of borrowing go up. We can get away with it at the moment because the rest of the world is in a similar position. Woe betide the country that doesn’t get its act together by the time the rest of the world has recovered.
As it is, it is just inflationary, and another kind of austerity when incomes don’t rise to match. (Does anybody know, when Labour go on about inflation hitting the cost of living, whether they are demanding tighter monetary policy?)
Stephen, Nick’s point is that there is no ideological shrinking of the state going on here, and the total spending figure confirms this. I agree we seem to be getting less for our money…
Much deficit reduction has been delayed. Public spending may be 42% of GDP in 2015-16 but current (unrealistic) plans are to cut that to 38% by 2018-19. Martin Wolf sums it up well (as ever):
“The chancellor is making two big judgments in his plans. One is that the ratio of public spending to GDP should be brought down to 38 per cent of GDP, among the lowest ratios in the past four decades.
Is it desirable for an ageing country, which has experienced a large increase in inequality over the past decades, to aspire to so low a share of public spending in GDP? ”
The point about ageing is key. We can’t give a rapidly increasing number of pensioners an ever-larger state pension, and the health and social care we need AND reduce total public spending as much as planned without substantial harm to all other state spending. Even if there had been no crash, we would need to be raising taxes to fund increased age-related spending. Current deficit reduction plans do not account for that.
Guys, the other day I finally saw a figure put to the “mega billions” I have suspected we are losing through tax reliefs. The National Audit Office put this at £101 billion for 2012-13, based on just 46 reliefs.
We need to start making big incisions into this budget, to save public services.
http://www.nao.org.uk/press-releases/tax-reliefs/
I’ve not read the full report, but eyes should at least be drawn to it.
Eddie,
HMRC publishes a table of so called Tax expenditures.
The biggest by far is the personal allowance and NI thresholds, then pension contributions and VAT exemption/zero-rating/reduced rates, capital gains on personal residence, accelerated depreciation (capital allowances), inheritance tax nil rate bands, double taxation relief, ISA’s etc.
Doesn’t mean there is not scope for reducing certain reliefs and making some significant savings – it’s just easier said then done.
Thanks Joe. It does look as though the amount we can actually cut is not as big as I thought. I used to think all capital allowances could go, but now I see they take the place of depreciation, which should be tax deductible, it just shouldn’t be “accelerated”.
Back to the drawing board I think, and I’ll have to get cracking with the rest of my exams.
Eddie,
The article you link to doesn’t say that the £101 billion is unjustified.
i am always deeply conscious these days that debt-interest now forms a greater percentage of gov’t spending the the primary duty of the naion-state; defence.
I will be delighted when total spending falls back below 40% of GDP, because that’s where I like it.
I will continue to demand that 2% of GDP is spent on Defence, and remain little concerned what happens with the other 38.
Neil
As I am sure you know, there IS an ideological commitment to shrink the size of the state, especially in the Tory Party, who are in business to “complete Thatcher’s work”, and our Orange Bookers went along with that idea, a) because they are not especially opposed to that, and b) because some were desperate for Government jobs. The alternative interpretation, that they were so naive they didn’t know what was going on, is almost as unpleasant for the Party to swallow.
And can I point out (again) that it is possible, in this context of an aging population more dependent on social care, that the recent pensions reforms may allow some people to spend their pensions more quickly, thus potentially reducing both their income and savings to the point that local government less able to reliably predict the extent to which it can claw back some income through means-tested contributions for social care?
Not to mention that the greater proportion of payments made by local governments’ new crisis fund payment arrangements are being made to cover over delays in payment of (centrally funded) benefits.
There is an ongoing tactic here of shifting financial liability to local government, and a certain party in power which claims to believe in devolving power and finance downwards does not (yet) appear to have been effectively able to have done anything concrete to stop or slow this process.
Matt (Bristol) – Exactly. Pensioner does not equal poor. The data is there and has been for some time.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/211685/pi-series-1112.pdf
There is a nasty question here about pensioners and fiscal consolidation and is one that all parties (stress, all) has rather ducked. I guess that one could make an argument that in effect Councils could be little more than one big care agency in future.
I not sure that it IS liberal to allow poorly educated folk to spend all their money on fags and booze and worse, though, Guido? That seems to me a libertarian position.
Liberalism is about empowerment, which entails a degree of paternalism. There has been a lot of disagreement in our party (since the Orange Book crowd took over) about exactly how paternalistic we should be. But I’m with Stephen on this one. Public education is an investment, and public health a necessity.
Joe Otten .>> Does anybody know, when Labour go on about inflation hitting the cost of living, whether they are demanding tighter monetary policy?<<
To be fair to Labour, they clearly learnt from the experience of the 1960s and 70s, and their record on inflation was quite good over the 13 years.
Terry, I am fond of a bit of paternalism too, but I don’t think it is fair to speak about the poor like that. For practical purposes I am not going to kick up a big fuss about a £12,500 tax allowance, but if we have it then we need to have a plan to increase productivity, the solution of which I don’t think is a load more borrowing.
Here is the elephant sitting in the corner of the room as if butter wouldn’t melt in her mouth: these figures are based on budgeting for a surplus by 2020.
The second important assumption underlying these figures is that through most of these years nominal growth is set well under the long term trend for nominal growth in the UK because of the Treasure and the Bank of England’s continuing obsession over inflation now at 1.7% here, 1.1% in the US and almost deflation in the Eurozone.
Richard’s link is very important as it provides the tool kit for budget making (which is no different to the way local government budgets are put together so anyone with experience of that should have no difficulty understanding an Autumn Statement).
I linked to this URL in comments around the time of the Autumn Statement when I also revealed the existence of the ‘Fiscal Compact’ secretly agreed between senior politicians that might be described as the ‘Quad’, though it probably number 8 plus advisers.
Whether the Party should support this Compact is the major decision facing it running up to the GE and it is great to see this excellent piece provoking debate now not least because the drive for a surplus has significant impact on a very small part of over all expenditure. That over which the Government has discretion amounts to only about £100 billion of the total GovernMent Expenditure, as Stephen and others point out.
Be sure that senior members of our Party are not all fully signed up to the Compact and there will be another major debate within their ranks in the Autumn. The Party could be involved in this if there were a debate at Conference.
I am on the road and do not have my papers, but it would be useful if the figures which are all on the public record were published here and debated. For example reducing the pace of deficit reduction (as Joe reminds us) is once again a key decision that could differentiate us from both the Tories and Labour. Committing to faster nominal would increase tax revenues. These are all key decisions which will be taken in the Autumn and which will determine key issues for the Election.
Terry, I think Labour would be pointing to the need for real wages to grow. As of course we should be .
It is suppression of real wages which is restraining recovery. That is why monetary policy should be targeted at nominal income growth.
The period of the Great Moderation much of which coincided with Labour’s term in office was based on fairly stable growth in nominal income of 5%. Inflation targeting of 2% worked well in such circumstances.
It worked less well when globalisation and technological progress produced benign deflation which monetary authorities set to deliver 2% CPI reacted to by loosening monetary policy … Hence the boom.
While the free market remains the primary engine of production and growth. there are some areas (defence, health, education, transport networks etc) and times (recessions) in which the free market will not be effective. Essential public spending and needed infrastructure spending has to be maintained to correct free market failures. As the economy is nursed back to full capacity/full employment and both firms and households begin investing and increasing consumption – only then can public spending be realistically reduced as a % of GDP in a counter-cyclical fashion.
Part of this state action to correct free market failures are fiscal measures aimed at supporting households consumption spending when wages rises do not adequately mitigate the impact of monetary inflation in eroding purchasing power.
In answer to Stephen’s question then , whether pledging to increase the personal allowance threshold to £12,500 at an estimated cost of £5 billion per year in 2014–15 prices is a responsible manifesto pledge for a progressive party, I believe it is – although I would prefer the additional spending capacity be introduced by way of a tax credit to all instead of a allowance against taxable income only.
Stephen Tall
It’s a soothing line from Nick Clegg, designed to reassure Lib Dems that the Coalition’s austerity programme is simply curbing the spending excess of the Blair/Brown years.
Indeed, it’s a right-wing propaganda line. As you rightly point out, Stephen, there are demographic reasons pushing public spending up, there are social and environmental reasons as well. If people want free health treatment and state pensions, then as there’s so much more we can do to keep people alive than we could in the past, spending on these things is bound to rise. It may seem to be keeping still or going down, but if there’s hugely more people living into their 80s and 90s and 100s, as there is, that is BOUND to have a huge spending impact.
So not to talk about it, and to pretend instead that keep spending as a proportion of GDP at the same levels means there’s been no big cut in the sort of support people get is wrong. It’s misleading, it’s not what a decent politician who does not have a bias should do. A decent politician should be honest about the issue, which is one of the most dominant issues in politics, though rarely spoken about directly. It doesn’t mean adopting one position of the other, but it does mean making clear to the people that they have a choice – if they want free health treatment and decent state pensions, then they have to be prepared to pay for it. Similarly, if people want free university education, obviously with a much higher proportion of the population going to university than in the past that means tax rises. It’s a choice people have to make, and it needs to be put openly to them. But here we have Clegg just NOT being open about this sort of choice, and instead playing the right wing line that denies the issue, which is the mirror image of the left-wing line that denies the issue by making out state spending comes from a magic money tree. Both lines are contemptible.
We need some decent honest politicians who don’t come out with contemptible lines like these, so we can have a proper debate and proper democratic decisions on these things, rather than silly games played by rival teams of professional PR types with the people of this country reduced to bored spectators.
Matthew.
I heartily concur with your last statement.