First published in the Telegraph on 28 June 2010
Depending on who you listen to, Britain is facing either a spending squeeze the likes of which we haven’t seen since the 1920s or a healthy 9pc increase in Government spending over the course of the Parliament. So which is it? The answer is both. This is something that has caused some degree of confusion and indignation in certain quarters (see Guido here and John Redwood here), with some commentators accusing the Government of not going far enough on spending cuts.
They are quite, quite wrong. Yes – Total Managed Expenditure – the comprehensive measure of how much the Government is spending each year – is going up from 696.8bn to 757.5bn, as the chart below from the Budget documentation shows.
Here’s the thing: this measure of cash spending has never, ever fallen since comparable records began 60 years ago (a period encompassing the cuts of the ’90s, ’80s, and post-Korean War in the ’50s). For reference, during Margaret Thatcher’s time in office, between 1979 and 1990, total managed expenditure in cash terms more than doubled, rising 154pc from 88bn to 224bn.
It is grossly misleading to look at spending solely in cash terms over the course of a few years, because the scale of that spending is relevant to the size of the broader economy. If the UK economy is generating more cash each year it can afford to spend a few more pounds on public spending.
To get a proper measure of the size of government spending you should try to offset it against economic growth and inflation. In other words, you should view spending in terms of how it compares to the overall size of the economy, and viewed through this prism, the picture shows a big decrease. To be specific, total managed expenditure falls from 47.5pc of GDP in 2009/10 to 39.8pc of GDP in 2015/16. This chart shows you the story, and on this basis the fall looks rather similar to the one in the early 1980s.
Moreover, a good chunk of what the Government is spending is more-or-less beyond its control. It can determine how much it spends on its departments (this is what is getting the biggest cut) but not on debt interest (one of the main contributors to higher spending in the approaching years), which is determined both by markets and by the legacy of debt from Gordon Brown. It can try to cut welfare payments (another blog on this soon) but many of these payments are tied to demographic factors and inflation so will keep increasing, at least in cash terms.
What this means is that it is Government departments which have to bear much of the brunt of spending cuts – in particular those departments unprotected by the coalition’s spending pledges (for which read the NHS, which will see real-terms increases in spending, and schools spending, which will fall by a little less than others). That is where those famed “25pc cuts” come in – that is the average cut faced by unprotected departments, such as the Home Office, Universities and others. Those are the cuts labelled by the Institute for Fiscal Studies as the worst since comparable records began.
Anyway, the fact is that Total Managed Expenditure is not the only yardstick for Government spending. An even more comprehensive measure – at least in economic terms – is to look at the contribution of the Government to the broader economy. This has the benefit not merely of telling you how the cuts will impact the UK on a broad scale but are calculated by the independent Office for Budget Responsibility, appearing in an appendix to the Budget. They show that over the next five years there will be a total fall of around 10pc in general government consumption.
To put this in perspective, according to Martin Weale of the National Institute for Economic and Social Research, this fall is far greater than those in the 1980s or early 1990s (a few percentage points), those in the 1950s (around 5pc points) and the 1930s (similar) – the other big episodes of spending cuts in British history. The only episode of spending cuts which is comparable in terms of scale (when it comes to this measure of government activity) is the 1920s, when, in the space of just over two years, government activity dropped by around 11pc (these were the Geddes Axe cuts).
The bottom line is this: overall spending will be cut, as hard as in the 1980s. The impact on the wider economy will be worse than anything since the 1920s. Trying to pretend the Government has mapped out a path towards more flabby Government is dangerously misleading.