Friday, 21 September 2012

Public spending 1

... if you cut today's public spending by the IPPR's other figure of 3.8%
this year and every year for the next 25 years,
it would fall to £263.8 billion,
which is still higher in real terms than it was in 1970-71.
It's a long time ago, certainly,
but we weren't exactly running around in nothing but woad 40 years ago,
there's plenty of room for 3.8% cuts. ...

----------  o  O  o ----------

There is currently a certain amount of debate in the UK about public spending. Iain Duncan Smith wants to "make work pay". Frank Field argues that means-testing rots people's souls. Support for the benefits system, a report says, is at its lowest level for three decades. And according to Alegra Stratton, the political editor of BBC TV's Newsnight, the government is eyeing an end to the link between benefits and inflation.

Ms Stratton laid out the options for public spending over the next few years, please see Wednesday's edition of Newsnight between 15'38" and 21'28". If the budget is to be balanced, the Institute for Public Policy Research say that public spending will have to be cut by 3.8%. If the NHS, education and international aid budgets are to be ring-fenced then the other departments face a cut of 8% in their budgets. There will have to be cuts, says Ms Stratton, and cuts upon cuts, and what does "8% cuts elsewhere, beyond the fence" mean? It means 8%, that's what it means, but Ms Stratton assists her viewers' understanding by explaining that that's equivalent to:

BBC TV Newsnight 19 September 2012
Either that, or huge cuts in welfare, which brings us back to Iain Duncan Smith.

The debate isn't exclusive to the UK. Mitt Romney makes his own pertinent contributions to it in the US.

And it's not a new debate, as Polly Toynbee reminds us in the Guardian. "David Cameron's mission was to break the postwar consensus on the welfare state that survived Margaret Thatcher", she says, and quotes the Institute for Fiscal Studies (IFS) claim that the overall spending cuts planned by the coalition government are "almost without historical and international precedent".

(Notice that "almost". What the IFS mean is that there are historical and geographical precedents. Almost the opposite of what it sounds as though they're saying.)

The debate is over-heated at the moment, permanently in danger of taking off into outer space – Ms Stratton's Newsnight package, for example, uses Mozart's Requiem as background music. The debate needs to be tethered to planet Earth. It needs some facts, to ground it, and HM Treasury have kindly published those facts in their report Public Spending Statistics July 2012, which includes the figures below in Table 4.1 on p.42:

Total Managed Expenditure

Nominal £billion
Real terms £billion
Per cent of GDP
1971-72
25.2
255.4
42.6
1972-73
28.3
263.9
41.9
1973-74
33.4
291.9
44.4
1974-75
43.7
319.9
48.7
1975-76
55.7
325.0
49.7
1976-77
63.6
326.4
48.6
1977-78
69.5
313.6
45.6
1978-79
78.6
319.8
45.1
1979-80
93.6
326.4
44.6
1980-81
112.5
331.8
47.0
1981-82
125.6
338.1
47.7
1982-83
138.3
348.7
48.1
1983-84
149.7
361.5
47.8
1984-85
160.0
367.8
47.5
1985-86
166.6
363.7
45.0
1986-87
172.8
366.5
43.6
1987-88
183.3
369.1
41.5
1988-89
190.7
360.5
38.7
1989-90
210.2
372.3
38.9
1990-91
227.5
376.1
39.2
1991-92
254.2
394.5
41.5
1992-93
274.2
416.5
43.3
1993-94
286.3
425.7
42.6
1994-95
299.2
438.5
42.1
1995-96
311.4
444.2
41.4
1996-97
315.8
437.2
39.5
1997-98
322.0
437.0
38.0
1998-99
330.9
439.9
37.0
1999-00
342.9
447.9
36.3
2000-01
341.5
443.7
34.6
2001-02
389.2
496.1
37.8
2002-03
421.2
523.8
38.8
2003-04
455.5
554.2
39.5
2004-05
492.4
582.0
40.5
2005-06
524.0
605.5
40.8
2006-07
550.0
619.0
40.7
2007-08
582.9
640.0
40.7
2008-09
629.7
673.0
44.3
2009-10
670.2
705.6
47.3
2010-11
689.6
706.1
46.6
2011-12
694.9
694.9
45.5
There follows a series of questions. DMossEsq doesn't know the answers.

41 years ago, 1971-72, annual public spending in the UK was £25.2 billion. Taking account of inflation in the intervening period, that is equivalent to £255.4 billion today in real terms.

Public spending today isn't £255.4 billion, it hasn't been maintained at its 1971-72 level. Instead, it's gone up to £694.9 billion. Why?

If public spending today was £255.4 billion, it wouldn't have been cut at all. For 40 years, it would have been maintained, guarded, ring fenced, ...

If you cut today's public spending by the IPPR's figure of 8%, it would fall from £694.9 billion to £639.3 billion, roughly the level of 2007-08. We were not in a state then – Ms Stratton please note – equivalent to having 70,000 fewer defence personnel and 20,000 fewer policemen and we wouldn't be now.

If you cut today's public spending by the IPPR's other figure of 3.8% this year and every year for the next 25 years, it would fall to £263.8 billion, which is still higher in real terms than it was in 1970-71. It's a long time ago, certainly, but we weren't exactly running around in nothing but woad 40 years ago, there's plenty of room for 3.8% cuts.

But was public spending in 1970-71 at the right level? What is the "the right level"? Perhaps we should choose a different base line. Which? And why?

Public spending today has gone up in real terms since the treasury's 1970-71 base line by a factor of 2.7208, it's increased by 172.08%. That means the state has taken on new burdens, burdens which it didn't used to shoulder. Is that a good thing? Or a bad thing? Is the state taking on unwonted responsibilities? Is it being intrusive? Is there any limit to the state's responsibilities?

The coalition government has not yet managed to cut public spending. Public spending has levelled off for two years but it hasn't been cut. Not appreciably.

It's hard to cut. It takes time.

Equally, it's hard to make material increases in public spending. Every time the NHS budget is materially increased, under whichever government, the question arises whether its systems can absorb all the extra money. Of course they can, but the question is whether the money can be used efficiently, without waste. No, it can't. Increases have to be planned, just as much as reductions.

The IFS describe 3.8% spending cuts as "unprecedented". For a conservative organisation like them, that is a criticism, they assume that you shouldn't do things that are unprecedented. If an action is unprecedented, does that mean it shouldn't be taken? Or is now the time to be radical?

The 172.08% increase from £255.4 billion to £694.9 billion over 40 years works out at a steady rate of increase of 2.5% p.a. But the change hasn't been steady.

Spot the cuts?

Cuts are not unprecedented. There are six years when public spending was cut:
  • 1977-78 (-3.9%),
  • 1985-86 (-1.1%),
  • 1988-89 (-2.3%),
  • 1996-97 (-1.6%),
  • 2000-01 (-0.9%)
  • and 2011-12 (-1.6%)
and 34 years when it went up.

There were two hefty increases in public spending, in:
  • 1973-74 (+10.6%)
  • and 1974-75 (+9.6%)
and the biggest ever was in:
  • 2001-02 (+11.8%)
followed by an unprecedented run of further increases – +5.6% in 2002-03, +5.8%, +5.0%, +4.0%, +2.2%, +3.4%, +5.2% and +4.8% in 2009-10.

To put it another way, public spending in 2009-10 (£705.6 billion) was 59% up on the 2000-01 figure (£443.7 billion) 10 years before:

Unprecedented?

Yes.

For 30 years, public spending had increased at an annual average rate of 1.9% from £255.4 billion to £443.7 billion in 2000-01. Then the rate of increase nearly trebled to 5.3% p.a., taking public spending in 10 years from £443.7 billion to £705.6 billion in 2009-10.

The end points of the solid lines in the graph above show what did happen, with the trajectory in between smoothed out. The dotted lines show what could have happened instead. On the established trend, the long run 30-year rate, public spending in 2009-10 could have been "only" £526.7 billion. Instead, it was £178.9 billion higher at £705.6 billion.

By the IFS's reckoning, those increases should not have been made.

Somebody nevertheless, ignoring the IFS, put their foot on the accelerator. During Labour's 1997-2001 administration, Gordon Brown as Chancellor of the Exchequer was wedded to Prudence. Thereafter, Prudence left and Mr Brown was joined by Sir-Gus-now-Lord O'Donnell, first as Permanent Secretary at the Treasury and then as Cabinet Secretary. Whose foot was on the accelerator? The cautious/prudent/indecisive and some say cowardly Brown's? Or O'Donnell's, the man to whom every government economist reported, the man who would be King?

Is the state better at allocating resources than individuals and private sector organisations? Or worse? Is state spending always benign? Clearly O'Donnell thinks the answer is "yes", but is it?

Today's public spending represents 45.5% of GDP according to the Treasury. With public spending standing at £694.9 billion, it follows that GDP must be £1,527.3 billion.

Does that mean that we can afford a public spending level of £694.9 billion, or that we can't? Is 45.5% of GDP the "right level" for public spending?

What's public spending got to do with GDP anyway? Does public spending act as a drag on growth? Or does it actually promote growth?

Can anyone answer these questions? Politicians? Mandarins? Economists? Journalists? You?

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