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”
Dominic Ellison
Will Straw refutes John Redwood's claim that far from cuts taking place, public spending is to rise over next 5 years http://bit.ly/b3eV8D
Will Straw
Thanks for the comments. Two points by way of response:
1. Inflation. The deflator which Nick Pearce used is from the Treasury. This is the correct deflator to use to compare government spending in real terms. Inflation is higher than the target so a higher deflator needs to be used. Defending Redwood for using 2% because it’s the BoE’s inflation target makes about as much sense as going to the US and asking for a $2 exchange rate because that’s what it was three years ago.
2. Presuming we want public sector wages to rise in line with living standards and that public sector inflation is higher than elsewhere, the %GDP is the right measure.
Will
idle pen pusher
“The number is, of course, entirely arbitrary.”
Yes and no. It’s the official inflation target. So for his purposes it’s not arbitrary. It’s only arbitrary in the context of determining what the target should be. (Why is 2% better than 2.03%?)
What is arbitrary is pointing to the current CPI figure and implying it’ll be frozen at that level for 5 years.
“When the economy is growing and living standards are rising, why should spending on health, education and other public services not increase accordingly?”
The public sector doesn’t have a right to help itself to people’s increasing producitivity. It’s there to provide services, surely? Surely the point isn’t to use up resources?
“Put another way, public spending is going to contribute the bulk of deficit reduction.”
Put yet another way, public spending will rise by approx £50bn and they’ll take almost £200bn more from us in taxes compared to what they do now. £200bn is not ‘tiny’.
“Meanwhile, fewer jobs means fewer opportunities for new entrants to the labour market and a bleak outlook for new graduates and school leavers.”
Business expects to employment to rise. It stands to reason that lower taxes (than the alternative) will mean lower unemployment due to a smaller tax wedge. Let’s revisit this post in 5 years.
“He neglects to mention that unemployment was over 3 million from March 1983 to May 1987. “
Unemployment now is over 6 million, including “incapacity” benefit claimants etc.
Michael Burke
On inflation, Redwood concedes that even at 2% inlation, there is no real rise in spending. But, since government says it will stick to these spending targets, the question is: how realistic is it that inflation will only by 2%, and to use that as a claim there are no real cuts?
The answer is, not very. An independent Bank of England has presided over an average inflation rate of 3%. The OBR forecasts an average 3.4% inflation over the period to 2014/15. So, the cuts will be deep in real terms, as the cumulative rise in prices is projected to be over 18%.
But Redowood has wandered to the outer shores of sanity in his claims about per capita spending growth, as he seems to think the population is static. It isn’t. It tends to grow about 0.4% per year, so again real cuts in per capita spending andservices. The population is also ageing, which would require increased spending even if the both prices and the population were static. So again, real cuts in the provision of services, not less than 15% in real terms.
Just like, er…George Osborne says.
Mr. Sensible
Will, fully agree.
The point about employment is particularly exemplified by 1 of the signitaries of that letter in the Telegraph yesterday. Because, at the same time as the head of Boots is saying the private sector can make up for public sector job losses, Boots is laying people off at its Nottingham and Feltham bases.