The cuts in spending are going to feel very unpleasant indeed. Rising interest costs,
resulting from past expansions in public debt, are going to crowd out other parts of the budget. It is proving difficult to curb the cost of transfers, such as benefits and pensions, and this
combines with the ring-fencing of health and development spending to leverage the cuts in unprotected departments. But, as I show in my report published today by the Centre for Policy Studies, the stark reality is that the spending clock is only being turned
back to 2008-09, not to the dark ages.
In fiscal year 2014-15 the government plans to spend £758bn, equivalent to £647bn at 2009-10 values. That figure is indeed lower than the out-turn for Labour’s last year in office – but not by very much, since £669bn was spent during 2009-10. In fact, the proposed spending reductions actually unwind just £22bn of the £230bn real-terms increase which occurred between 1999-2000 and 2009-10. Cuts, yes. But “massive”, as many have claimed? Hardly.
Exaggeration of the true magnitude of the spending cuts is but one of the many myths that obscure the current debate on fiscal and economic issues. The biggest myth of the lot is that there is an alternative, a soft option which would spare the public. The reality is that there isn’t. No less an institution than the Bank for International Settlements has shown that deficits at the 2009 level would drive public debt to 300 percent of GDP by 2025, resulting in large part from the compounding effect of adding interest on prior debt to each year’s underlying shortfall.
Borrowings of this magnitude would be impossible to service even if they could be sourced. The very least that could be expected would be a gilts ‘strike’, and sharp rises in interest rates that could reduce many of Britain’s 11.4 million mortgage payers to penury.
Neither is it true that the quality of public services correlates directly to levels of expenditure. Official data suggests otherwise, but it leaves a great deal to be desired. According to the Office for National Statistics, health care outputs increased by 69 percent between 1995 and 2008. Since this was only slightly less than the 75 percent increase in inputs over the same period, productivity declined by just 3 percent.
The reality is rather different. First, volumetric ‘inputs’ may have increased by only 75 percent between 1995 and 2008, but real spending on health actually rose by 116 percent. Second, reported outputs are skewed by the volumetric inclusion of the trebling in prescriptions between those dates, even though it is at least arguable that a healthy population might require fewer prescriptions not more. Adjusted for these factors, health sector productivity actually fell by 34 percent between 1995 and 2008.
The broader point is that productivity is much lower in the public than in the private sector. This is not an argument against providing quality public services, but it does suggest that the massive transfer of resources from the high-productivity private sector to the lower-productivity public sector between 2000 and 2009 had adverse effects on growth. It didn’t look that way at the time, of course, because Britain was riding Gordon Brown’s reckless debt-fuelled “boom” for most of that period.
Growth is critical to the government’s plans – if growth were to fall significantly short of OBR projections, the planned increases in real revenues over the coming five years would fail to materialise. If growth is to flourish, interference from national and local authorities needs to be curtailed. The Global Competitiveness Report found that the “burden of government regulation” handicaps businesses more in Britain than it does in such soundly governed polities as Nigeria and Zimbabwe. It is obvious that the critical issue is to get government off the back of businesses.
Tim Morgan is Global Head of Research at Tullett Prebon plc. His report, Five Fiscal Fallacies, is published today by the Centre for Policy Studies
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