Five reasons why Redwood is wrong

John Redwood today writes that spending will continue to rise. He is wrong: public spending will be cut dramatically and will make up the bulk of deficit reduction.

John Redwood uses an article in today’s Times (£) to peddle the myth that far from cuts taking place, public spending is set to rise over the next five years. In an interesting piece for Conservative Home, the thoughtful Tim Montgomerie has taken Redwood and fellow outriders Dominic Lawson and Allister Heath to task for “making the Right look out-of-touch with the real world”. As well as getting his internal politics wrong, Redwood is also out to lunch on the economics.

1. Redwood uses the wrong inflation measure.

Redwood concludes that allowing for 2 per cent inflation each year:

“You still end up with a small increase in total current spending over the five years.”

The number is, of course, entirely arbitrary. CPI inflation is now 3.1% and RPIX is 4.6%. Adjusting for inflation, ippr’s Director Nick Pearce has shown:

“the figure for 2015/16 is actually £630.6 billion – a real terms cut of nearly £7 billion.”

“But that’s not the whole story. PSCE is divided into Annually Managed Expenditure and Departmental Expenditure Limits. The former covers things like social security benefits and debt interest payments; the latter is current spending on services like the NHS, schools and so on. In 2010/11, this spending on departmental services is £342.7 billion. By 2015/16, that figure is set to be £340 billion in cash terms and £301.4 billion in real terms – a real cut of over £40 billion.”

2. A better measure of public spending is as a proportion of GDP.

When the economy is growing and living standards are rising, why should spending on health, education and other public services not increase accordingly? If public sector salaries were capped at the inflation level, we would never see any rise in living standards for public sector workers. And as Montgomerie points out, “the rate of inflation in much of the public sector (not least defence) is higher than the average growth in prices.”

This is why the more common measure of public spending is as a percentage of GDP. The latest public expenditure figures are clear on this (Table B2): Public spending will fall from 47.7% of GDP in 2009-10 to 39.8% in 2015-16.

3. Tax will make a tiny contribution to deficit reduction.

Redwood claims that taxes will contribute 43 per cent of deficit reduction next year. This is true but by the end of the Parliament, the Treasury figures show that tax will have contributed a much smaller 26 per cent (falling to 23 per cent in 2015-16).

But this only tells part of the story. The Office of Budget Responsibility suggests that falling growth will mean that the net tax rises announced in the June Budget of £8.2 billion by 2015-16 (Budget Table 2.1) will actually deliver just £3.2 billion (Budget Table C12). This would mean that taxation would contribute much less than initially thought. Put another way, public spending is going to contribute the bulk of deficit reduction.

4. Public sector employment losses will be damaging

Redwood claims that as jobs are lost in the public sector, others will be created elsewhere. He suggests that “natural wastage” will reduce the human impact. The bad news is that the private sector recovery is showing little sign of picking up. The Federation of Small Businesses says today that “10.4 per cent of firms expect to decrease employment over the next three months as business confidence in future prospects and revenue growth weakened over the July to September period.” Meanwhile, fewer jobs means fewer opportunities for new entrants to the labour market and a bleak outlook for new graduates and school leavers. And, of course, a rising level of unemployment means more public spending has to be spent on jobless benefits.

5. Unemployment was stubbornly high during the 1980s

Redwood writes:

“From 1983 to 1989 employment rose strongly. This was a period when public spending as a proportion of national output fell from 42 per cent to 35 per cent owing to strong private sector growth.”

He neglects to mention that unemployment was over 3 million from March 1983 to May 1987. The employment rise was due to strong growth in 1984 and again in 1988 and 1989 as a result of the Lawson boom.

Thanks to Tony Dolphin for his help with this piece.

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26 Responses to “Five reasons why Redwood is wrong”

  1. Katie Spenceley

    RT @leftfootfwd: Five reasons why Redwood is wrong http://bit.ly/aPH06A

  2. Shamik Das

    Five reasons why Redwood is wrong: http://bit.ly/aPH06A by @wdjstraw on @leftfootfwd

  3. James Dennis

    RT @leftfootfwd 5 reasons why Redwood is wrong http://bit.ly/aPH06A > followed by a response from me.

  4. jdennis_99

    My response:
    1. Fair point. The spending revisions, even taking into account inflation (at its current, not target level) will result in a decrease in public spending.
    2. Completely flawed. Just because the economy is growing and living standards are rising does not automatically mean we have to increase public spending. The amount we are spending on public services should be measured by what we are trying to get out of them, not by what we’re trying to put in. Measure by outcomes, not by intentions.
    3. The prediction by the OBR is just that – a prediction. Another alternative prediction is that economic growth will actually pick up following restored confidence, and therefore tax revenues will rise.
    4. You are forgetting about entrepreneurship. People will not automatically seek direct employment, but choose to go down the self-employment route – exactly the kind of thing we need to encourage. This area of the economy is extremely dynamic and important, but highly fluid, and therefore difficult to measure by normal statistical methods.
    5. Granted, unemployment was high, but Redwood is not actually wrong. Unemployment did fall significantly during that period.

  5. Billy Blofeld

    Have you put these points to Redwood to defend / correct?

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