Brown’s second spending spree
Andrew Lilico 10:59am
Public spending is currently accelerating at an unprecedented pace — more swiftly, even, that during the total loss of control during the 1970s. Spending is due to rise £120bn, 20%, in just three years from 2007/8 to 2010/11, taking it from 41% of GDP to above 50% — a much more rapid rise than in other parts of the world, lifting us from well below the EU average to well above. The considerable majority of this rise is not the automatic result of the recession (extra unemployment benefits, etc.) – only 38% takes this form. Neither is it any kind of “public works” programme – only 6% is extra capital spending. Instead, the vast majority is extra consumption spending. Many economists might support increasing spending during a recession. Few would support increasing spending for this.
This extraordinary rise is a problem in itself — quite apart from any issues of increasing government debt or increasing the budget deficit. Spending at such a high level reduces the growth of the economy. Authoritative estimates produced by European Central Bank researchers suggest that each additional percentage point of GDP in public spending reduces the growth rate of the economy by 0.12-0.13%. So, raising spending by 10% of GDP would be expected to reduce the growth rate of the economy by 1.2-1.3% - halving it from its previous level of around 2.6% per year down to more like 1.3%. At this much slower growth rate, tax revenues would grow much more slowly and the government would struggle to repay the debts it is currently accumulating.
Labour’s 2009 Budget plans already include space for an additional £50bn-£70bn of fiscal tightening. Since 80% of the tightening they have scheduled after 2011 takes the form of spending cuts, we can therefore expected Labour, if re-elected, to cut spending by some £40bn-£60bn, perhaps more. If other parties are serious about controlling spending more tightly than Labour, they should therefore be anticipating spending reductions, relative to the 2009 Budget plans, greater than this.
If spending were immediately frozen at its 2008/9 level, apart from spending in areas such as benefits that rise automatically in a recession, by 2010/11 savings would already be above £50bn. If you don’t increase the spending now, you won’t have to cut it later. Do opposition parties really want to accept, unchallenged, plans in which there are huge spending rises in the run-up to the next General Election with rapid cuts scheduled for just before the following General Election? Was spending on health, education, etc. really felt to be so low in 2007/8 that we needed to increase it by nearly 20% in just three years? Does anybody believe there can be any serious return on such a wild spending spree? And why has there been so much discussion about the merits or otherwise of a £12bn tax cut and almost no debate at all about a £120bn spending rise?
Andrew Lilico is the chief economist at Policy Exchange. Their report on public spending can be downloaded here.
Previous
John
June 4th, 2009 11:23am Report this commentThis is an outrage
Sir Graphus
June 4th, 2009 11:26am Report this commentThe normally mild and measured Matthew Parris' description keeps coming back to me; "a deranged monster of a politician".
oldtimer
June 4th, 2009 11:28am Report this commentThe problem is that the problem is not getting the visibility it deserves other than from commentators like yourself and the IFS.
In the USA I see that Mr Bernanke (in evidence to Congress) has spoken out on the need to restore fiscal balance. See and hear here (about 11 to 12 minutes in):
http://www.cnbc.com/id/15840232?video=1140448485&play=1
as the USA deficit spirals from c40% to c70% of GDP.
We need someone, equally authoritative, to spell out the true situation here in the UK. At the moment we seem to be sleepwalking to disaster.
Mark
June 4th, 2009 11:33am Report this commentFiscal incontinence + Gordon Brown.
And other forms of incontinence if a certain photo is to be believed!
HedgePig
June 4th, 2009 11:34am Report this commentThis is the agenda that Balls would pursue if he bumps Darling, quite possibly creating the vicious spiral you outline and credit rating downgrade that implies. Meanwhile, the siege of No.10 continues with Dear Leader telling all and sundry to come and have a go if think they're hard enough. Mr Cameron needs to talk about Labour Cuts - cuts in jobs, cuts in tax revenue, cuts in prospects for our school leavers. Cuts in Labour MPs would be preferable.
Richard
June 4th, 2009 12:19pm Report this commentA scorched earth policy from a truly evil man.
Denis Cooper
June 4th, 2009 12:24pm Report this commentWhere is all this money going?
Is the question I've been asking for the last eight years now.
1997 - 2001 - yes, I could understand that there was a need to spend more on public services after a period when rather too little had been spent.
But after that catch-up period, why more and more and more, and where has it all gone?
The problem now is that suddenly chopping say 20% off public expenditure would be such a shock that it could send the economy into meltdown.
Yes, I know that the free market would respond etc etc, but it couldn't respond quickly enough.
Having said that, it's unbelievably stupid and irresponsible to carry on recruiting people into highly-paid non-jobs in the public sector.
When the MPC decide that they can no longer justify printing money and passing it to the Treasury through the gilts market, we could all be in very serious trouble.
Like Latvia, where apparently the government has just tried to borrow $100 million, but failed to sell a single Treasury bill.
TrevorsDen
June 4th, 2009 12:26pm Report this commentBrown needs someone compliant in No11 to spend spend spend - all in the name of bribing the electorate.
Fox in a box
June 4th, 2009 12:33pm Report this commentI think I'm going to EXPLODE!!!
Someone please sweep this man from office. He's a traitor to the nation.
Simon Stephenson
June 4th, 2009 2:45pm Report this commentI think we need to wake up to the fact that this is not Brown/Balls and Co.'s short-sightedness about future implications, but a DELIBERATE attempt by these secret socialists to frustrate a future leader who wishes to strengthen individual freedoms and responsibilities.
It's not difficult to conclude that expanding spending is far easier than curtailing it, nor that responsible, non-socialist public financing recognises that today's discretionary new-area spending is tomorrow's ring-fenced commitment.
Whatever Brown, Balls etc. are, they're not half-witted. They see this the same as anyone else.
Ray
June 4th, 2009 2:48pm Report this commentI think the Germans would call it 'Gotterdammerung': New Labour going out in a blaze of public spending glory, bringing the UK economy crashing down around them as they leave.
Moraymint
June 4th, 2009 3:24pm Report this commentI've said this before, and I don't mean to be alarmist, but here in the Moraymint household we have for some time been preparing for socio-economic armageddon in the UK.
Our political elite has lost the plot and, in particular, lost all control over the economic agenda. As Cameron keeps pointing out, our society is broken and will proceed to disintegrate as the economy melts. None of the main political parties show the slightest sign of understanding, still less dealing with the breathtaking scale of the national financial disaster.
Our foreign policy is an incoherent joke and our valiant but grossly under-resourced armed forces are becoming irrelevant on the world stage ... so bring them home in preparation for UK street operations.
Natural resources are depleting at an alarming rate in the face of exploding global (and national) population levels. Peak Oil has arrived. The UK's energy security is risible; the lights will be going out in less than a decade.
If that all sounds a bit dismal, it's because the situation is indeed much worse than you'll ever discover from attending to mainstream news media. But do a little research on specialist and technical websites and the true picture becomes clear.
Andrew Lilico's analysis above is just another straw on the Moraymint camel's back. Anywyay, time to tend the seed beds, feed the chickens, clean the water butt filter etc etc.
Giles
June 4th, 2009 3:29pm Report this commentAre any of you capable of writing a decent critique of this piece, or are you all just engaged in a competition to see who can shout and rant the most? Let's take it as read that Spectator readers hate Brown. Stop the press.
Andrew L's piece is cunningly written, in how it switches between measures for maximum effect. Dividing through by GDP, when the latter term dived catastrohpically between plan and delivery, is disingenous. So is using absolute figures. The £120bn increase was too high, sure, but in the original plans:
http://www.hm-treasury.gov.uk/d/bud08_chapterc.pdf table C4
the increase from 07-8 to 10-11 was just 4.8% p/a, about the same as nominal GDP was scheduled to rise. The extra £25bn WAS mostly about recession-spending. The original plans had a lower future rise pencilled in.
Brown made serious mistakes in his Budgets, but the major theme was relying too much on revenues that were flighty - like stamp duty and financial bonus taxes. What you right-wingers won't appreciate is how a big part of the solution is to replace these with other taxes. If you want to read about how hard it is to cut expenditure quickly, go to Lawson's biography, or the 1976 papers of Healey - both convinced cutters in their time.
In the meantime, rant on.
Back to top