When the Chancellor stands up to present his spending review next Wednesday it will be with the reputation of a crazed axeman. Much of the country, whether it thinks it a good thing or not, subscribes to the belief that George Osborne is shrinking the state year-on-year, slicing here, chopping there. In a recent poll 58 per cent of respondents agreed with the proposition that Osborne’s ‘austerity drive’ is ‘harming the economy’. Twenty per cent agreed that it was the ‘correct medicine’.
Yet it was a trick question based on a faulty premise: that there has been an austerity drive. The truth is that public spending has risen under this government — and in real terms, too. In 2009-10 public sector current expenditure, adjusted to 2011-12 prices, was £634.2 billion. By 2011-12 it was £645.7 billion and in 2012-13 it is projected to have been £647.1 billion. A more correct question for the pollsters to ask would be: do you think that George Osborne should stop flinging our money about, and actually begin the austerity drive that he keeps talking about?
Osborne is no mad axeman but a bodger blundering around with a blunt chisel. Go back further and you can see just how absurd is the notion that the coalition has turned Britain into neoliberal hell or paradise, depending on your point of view. In 1975/76, in the depths of economic crisis and shortly before Denis Healey went off to the IMF to beg for a bailout, public spending peaked at 39.8 per cent of GDP. In 2011/12 it was 42.2 per cent. That year, the then Labour government spent, in today’s money, £260 billion — less than half what the coalition will spend this year. In other words, the sub-socialist British state of the 1970s, with its nationalised car factories and shipyards, was smaller than it is now.
Yet George Osborne has never sought to challenge his axeman image. When challenged by Labour or the IMF over ‘austerity’ he has happily accepted the charge, protesting only that he still believes he is on the right course and will not be distracted.
He wants us to believe that big cuts are taking place. Take the Cabinet Office’s Efficiency and Reform Group, which crows about having made £5.5 billion worth of savings on the civil service last year and claims to be on its way to saving the taxpayer £20 billion by the next election, through such means as reducing the cost of employing temporary staff and improvements to procurement.
The National Audit Office was not so impressed, concluding recently that too many of the savings were only temporary in nature and that without proper reform it isn’t clear how the £20 billion target will be achieved. Yet it wouldn’t be hard to achieve the target if the government really wanted to. Even after the attentions of the Efficiency and Reform Group — which itself cost £72 million to run last year — civil servants are still enjoying two-and-a-half ‘privilege days’ a year on top of their bank holidays, they still qualify for a £75 evening dress allowance, and subsidised loans to buy bicycles.
The state has paid £500 million over the past three years to send the children of diplomats and military officers to public schools. Civil servants who began their careers before 2002 are still retiring at 60 and taxpayers are forking out £912,000 a year to subsidise flying lessons, diving lessons and trips to Barbados through the civil service sports council.
Dwarfing all this are bloated wages and salaries. Remember Osborne’s great public sector pay freeze, supposedly imposed for two years in 2012? Why, then, did the public sector pay bill rise from £165 billion in 2009/10 to £171 billion? The pay freeze was a mirage, through which many workers continued to enjoy fat increases in pay.
During the boom years the public sector unions liked to compare themselves with the private sector. But come the recession, when private sector pay started to fall, funnily enough they stopped doing so, with the result that according to the ONS, public sector pay is now 8.2 per cent higher than in the private sector. The Taxpayers’ Alliance (TPA) has calculated that if public sector pay and pensions were reduced to bring them in line with their private sector equivalents, it would save the taxpayer £53 billion a year.
That is the sort of saving which a genuine austerity chancellor would be proposing — and indeed is the sort of saving which a future British government may have to make if the deficit is not closed and the country is forced, as it was under Healey, to seek a humiliating bailout from the IMF or elsewhere. We don’t need to have a deficit. The TPA went on to detail a total of £120 billion of possible savings a year: from the really big sums, including £20 billion from fraud, £15 billion on procurement and £5 billion on benefits paid to families with incomes of over £100,000 a year; to the petty level where public money continues to be frittered — such as £2.3 million a year subsidising the restaurants in the House of Lords, £683,000 refurbishing 10 Downing Street, and £20 million spent translating council documents into obscure languages for the benefit of hardly anyone.
The TPA reached its £120 billion figure while hardly touching the swollen NHS, education and International Development budgets which Osborne has ring-fenced. But why should these budgets be protected from the need to cut spending? Is the Chancellor really saying that no school, hospital or development agency is guilty of waste?
What about the £17.5 billion set aside for medical negligence claims, much of which will disappear into the pockets of lawyers? That could be trimmed in one go with an end to ‘no win, no fee’ agreements and the spurious claims that result from them. What about the £700,000 spent sending staff at NHS England on team-building exercises, the £4,800 spent on breast implants for an aspiring model who claimed that having small breasts was ruining her life, or the average £2,492 spent sending patients on ‘exercise referral schemes’ — i.e. subsidised gym and dance classes?
What about the money wasted on iPads and interactive whiteboards for schools? What about the £5 million spent organising a Question Time-type show in Bangladesh or £25 million spent on climate change adaptation in Kenya, part of which was used to help tribal ‘rainmakers’ to come up with a consensus weather forecast with the country’s meteorological service?
What George Osborne has failed to appreciate is that public spending is a monster which will happily munch through every possible resource held in front of it. It takes ruthlessness just to keep it under control, let alone to shrink budgets. Generating headlines about ‘heartless cuts’ on the Today programme — something which has been achieved by every government in living memory, Gordon Brown’s included — doesn’t mean you are reducing the deficit; it just means you are holding back from funding some extravagance which someone, somewhere would like you to fund.
While saving pennies matters, the public budget will never be balanced again unless government is prepared to tackle the really big items of expenditure: health care, welfare and education. The government has tried quite hard to rein in the benefits bill but has ultimately surrendered, and has now settled for a slower rise than had previously been predicted. But when it comes to the largest item of the Department for Work and Pensions’ budget — the state pension — the government has not even tried to rein in costs. Quite needlessly, it has committed to increasing the state pension with a ‘triple lock’: guaranteeing to raise it by inflation, average earnings or 2.5 per cent, whichever is greater.
The result is that even if the cost of living falls — as it did in 2008/09 — the state pension will still be jacked up by 2.5 per cent. The projected cost of the triple lock is eye-watering: within 20 years the annual bill for the state pension will rise — at 2012 prices — from £63 billion to £106 billion, or from 4 per cent to 4.4 per cent of GDP.
One appreciates that pensioners get jolly angry — and with some justification get upset when they read about benefit claimants receiving more than they do — but why the need, in the middle of a budgetary crisis, to treat them to a more generous deal than any government has previously offered them? The coalition seems to be at war over welfare, with Nick Clegg at the weekend threatening to block reform if benefits for wealthy pensioners are not also cut back. There is a perfectly simple solution to satisfy both sides of the coalition: cut the benefits and don’t increase the pensions above inflation.
Osborne has all too easily allowed himself to be smothered by the argument advanced by Ed Balls, the IMF and others that only public spending keeps us out of the quagmire of recession. In its extreme Gordon Brown form, this doctrine arrives at the conclusion that there cannot be any such thing as public sector waste: every penny spent by the government, regardless of purpose, is necessarily another penny sloshing around the economy which otherwise would not be. It is a theory which has a rather obvious fatal flaw: the penny spent by the government must come from somewhere. If it does not come directly out of the pockets of individuals and businesses, it comes from borrowings which must eventually be repaid. What really matters is whether the penny is being productively spent. Because the public sector has such a dire record on productivity, a transfer of resources from private to public sector is going to have a negative effect on economic growth.
It was a lesson best demonstrated in Sweden, a country often held up as an example of the good of public spending, but which saw a dramatic increase in growth between the mid-1980s and the mid-2000s when spending was slashed. In the first decade of that period, economic growth averaged 1.5 per cent a year. In the second decade of that period, during which public spending was progressively cut from 71 per cent to 51 per cent of GDP, the economy grew by an average of 4.5 per cent a year.
A braver chancellor than George Osborne would not be boasting about cuts and then gingerly trimming a bit around the edges while maintaining public spending above 40 per cent of GDP; he would be delivering a spending review which reduced public spending closer to the 30 per cent mark (it touched 34 per cent in 1999, before Gordon Brown’s spending splurge). Anaemic growth is not a function of cuts in public spending, of which there have been none. It is a result of a swollen public sector trapped in low productivity.
The art of taxation, observed Mark Twain, is like plucking a goose to obtain the greatest amount of feathers while suffering the minimum amount of hissing. In attempting to cut public spending, George Osborne has achieved the exact opposite: he finds himself cornered in a shed by the hissing, spitting goose of public spending, whose feathers are growing faster than he can pick them out.