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”
Stephen W
1. In addition to what the guy above says, 2% is not arbitrary because not only is it the BoE target figure, they are repeatedly claiming it is one they will actually meet over the next 5 years. It is possible to argue the BoE are delusionally optimistic, but it is not a trivial point. Even if we take a slightly higher average inflation measure, says 2.3%, public spending only flatlines in real terms.
2. It would be nice for public spending to hold as a percent of GDP, but that is massively different from the left-wing rhetoric you and others have been pushing about dismantling the welfare state, a return to the 1930’s, ideological attack on public spending etc, etc. You are a slippery fish who changes his words to suit his audience.
3. In real terms public spending will only fall from around £700 billion to about £670 billion in real terms. If the deficit does come down over this period it will, logic dictates, be almost entirely due to tax revenues increasing to come up to this figure. Redwood is correct.
Of course cuts will still be painful. Going from public spending expanding at 6% a year to falling by about 1% a year will hurt, especially with interest payments rising due to all the borrowing labour left us with before and through the recession. This will mean many other cuts in programs will be required to keep spending down to these totals. But that reflects rather the unsustainable rate of expansion of public spending under Labour’s plans rather than that the Coalition is crushing public spending.
Matt Lent
RT @leftfootfwd: Five reasons why Redwood is wrong http://bit.ly/aPH06A
Tom Ladds
Right wing Tories have no idea of the damage they are about to inflict RT @leftfootfwd: Why Redwood is wrong http://bit.ly/9qQfSr
Michael Burke
For a staunch Thatcherite, Redwood is somewhat coy about defending the record in total, “From 1983 to 1989 employment rose strongly.” But her premiership began, as everyone knows, in 1979 when employment as 24.7mn. It then fell very rapidly to 22.4mn at the beginning of 1983. The less rapid rise from that point on meant employment was still 1/2 million below its when she was ousted in 1990. Employment didn’t recover its former peak until 1998 -under Labour.
Further, spending didn’t fall as a proportion of GDP until 1986/87- as driving up unemployment swells the welfare bill no matter how much benefit entitlements are slashed.
adrian
“driving up unemployment swells the welfare bill no matter how much benefit entitlements are slashed”
not if they are slashed to nought and we allow people to work rather than parking them for life in front of jeremy kyle.