The only way to really cut spending is to reengineer the state
A YEAR ago, the political establishment was still obsessed with the debate over austerity; today, hardly anybody cares any more. Labour has moved on to fresh territory, as has the coalition. The reason, of course, is that growth has returned: the anti-austerians only had traction when it was possible to argue that cuts were preventing the recovery. Now that the economy is set to grow by 2.7 per cent this year, that argument has lost all of its potency.
This is good news: public spending remains far too high in the UK, as does the deficit, and needs to come down substantially. The UK’s net debt is set to peak at 78 per cent of GDP in 2015-16; and it will take until 2018-19 for the deficit to be eradicated and the public finances to return to a surplus, all being well.
The question is how to best reduce spending. The latest estimates from the Office for Budget Responsibility calculate that total public expenditure will fall by just 3.9 per cent in real terms between 2010-11 and 2018-19. This is a key figure and one which is almost never discussed: the reason why the number is low, almost absurdly so, is that it camouflages higher spending in some areas (including debt interest payments) but dramatically lower spending in others. The fact that some departments are protected – not least health – adds to the dramatically imbalanced picture. Of the 3.9 per cent in total cuts, 2.6 per cent is due to have taken place by 2015-16, with spending expected to fall by 0.7 per cent in 2016-17, 0.7 per cent in 2017-18 and zero per cent in 2018-19.
But while the actual value of the cuts is small and far, far lower than almost anybody realises, the impact on the size of the state will be hugely magnified by the fact that the economy is growing again. On the figures used by the OBR, public spending will fall from a peak of 47 per cent of GDP in 2009-10 under Gordon Brown to a dramatically lower 37.8 per cent by 2018-19.
This would be a massive reduction in the relative size of the state – but of course it assumes that the chancellor’s spending plans and the OBR’s growth forecasts materialise. A change of government in 2015 would certainly put paid to that, as would anything that were to derail the recovery. The forecasts also assume that government consumption of goods and services – a narrow but telling definition which excludes transfers such as benefits and capex – would fall back to a share of GDP last seen in 1948.
So what should we make of such predictions? In theory, and even though the coalition is not actually cutting absolute amounts of overall spending by much, they suggest that a two-term Osborne chancellorship (if it ever happens) could end up being very radical indeed. The overall size of the state would end up drastically reduced and the only thing left of Gordon Brown’s legacy on spending would be a dramatically higher national debt.
There is just one big problem with this remarkable scenario: simply squeezing spending can only go so far. At some point, the only way to sustainably reduce the size of the state is to reengineer entirely what the government does, to reassess the responsibilities of individuals and state, to work out whether new forms of financing should be introduced, and to shift towards private provision when possible. The sort of radical thinking that Osborne displayed when ditching annuities would need to be applied to the entirety of the public sector. Merely seeking to cut welfare payments – excluding those of Tory voting pensioners, of course – will never be enough.
So far, however, there are no signs of any of that. The big danger of squeezing spending without reengineering the delivery of health and other services is that quality will eventually suffer, and that the electorate will once again turn to the left, as it did in 1997. A smaller state is a great idea – but it needs to be achieved in the right way if it is to be sustainable.
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