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.
26 Responses to “Five reasons why Redwood is wrong”
Phil Taylor
Will,
Thank you for a laugh on a gloomy Monday. At point 4 you quote a FSB stat that “10.4 per cent of firms expect to decrease employment”. This means that 89.6% of firms expect to freeze or increase employment. I’d say that sounded pretty upbeat. BTW my statement is logically irrefutable. Just think about it for ten seconds!
Grumpy Bearz
RT @jdennis_99: RT @leftfootfwd, http://bit.ly/aPH06A <= Not many people agreeing with @leftfootforward are there? Muahahahaha
harry potter
of course, if the conservatives had been in power since 1997 we’d have had more public spending and lower debt. that’s because the economy would have grown more and there would have been more to tax.
look at how the ftse-100 fared over 13 years of conservatives 1984-1997 (300% growth) and over 13 years of labour 1997-2010 (no change, slight trend down).
see for yourself – http://uk.finance.yahoo.com/q/hp?s=^FTSE
Anon E Mouse
Will – I think the problem with the unemployment statistics you use was Maggie Thatcher’s stupid idea to fiddle the figures by putting people on Incapacity Benefit.
Those people genuinely in need of the benefit weren’t helped by millions suddenly not well enough to work.
You should have figures Will that represent those not working and drawing state benefits as a more accurate guide…
It doesn't add up...
1. Redwood’s choice of 2% inflation is not arbitrary: it is the inflation target that the Bank of England is supposed to have, as selected by no less than Gordon Brown. If that target is not going to be met, that will be due to promoting inflation via QE and too low interest rates.
2. Rising real salaries are sustainable only with a rise in real productivity. Public sector productivity has been falling, so there is probably plenty of scope for it to rise. There is no obvious reason why there should be higher inflation in public sector items than in the economy as a whole – unless there is carelessness in procurement. Indeed, after a period of higher inflation a period of lower inflation seems more than a possibility. Rising prosperity is never associated economically with a rising share of state expenditure. Historically, the economy has prospered most when recovering from high levels of state expenditure most often associated with war (most recently after the end of Cold War).
3. The risk is that tax raised will fall well short of optimistic projections that assume increasing numbers of very high earning self employed people buying lots of houses at even more grossly inflated prices for example. Nevertheless, the projected increase in tax revenue is 36% over 5 years. Far from tax being assumed to make a small contribution to reducing the deficit it is expected to do the heavy lifting to a degree that is questionable. Indeed, current talk about resuming QE may be partly motivated by lower than anticipated tax revenues garnered by ambitiously high rates.
4. Creating real productive jobs is made more difficult by regulation and taxation and high housing and energy costs in comparison with our competitors. Makework in the public sector may keep some people from roaming the streets, but it is disguised unemployment.
5. Partly as a consequence of 4. employment is an economic lagging indicator. People only finally lose jobs when it is plain that the costs of making them redundant are far less than the costs of keeping them on. Similarly, employment only picks up when existing employees are being stretched on overtime, because of the costs and risks of taking on new employees.