Update 43 – July 2013
Shrinking the state: the public spending settlement to 2016
The last week of June saw two closely choreographed Treasury announcements. On 26 June the Chancellor published the latest episode in the ‘comprehensive spending review’ – an extension of planned public spending for a further year, to 2015-6; and a day later the Chief Secretary to the Treasury, the Liberal Democrat Danny Alexander, published a set of plans for investment in infrastructure stretching over several decades.
The two key things to bear in mind in assessing public spending plans are that every decision is intensely political; and ‘headline’ figures almost never mean what they purport to mean. This last review is no exception to these rules. While it is plainly sensible to plan spending ahead in broad terms – that is why we have comprehensive spending reviews spanning several years – a budget of spending for a single year three years from now has very little precise meaning. Its most important function is political: the Chancellor, George Osborne, is doing his job in fashioning a set of plans designed to create problems for his Labour opponents, notably in the election year of 2015. How far do they reject his plans, and allow him to paint them as spendthrifts, or accept them, and risk alienating Labour’s electoral base and trade union support? Mr Alexander’s announcement was intended to paint the bright side of the gloomy austerity picture: a side intended to show that the government is investing long term in the infrastructure – roads, rail – needed for a productive economy.
That is the politics. Then there are the figures. It is undoubtedly the case that Mr Osborne’s plans entail real, substantial cuts in many services, for most central departments and for all local government: jobs will be shed; public sector pay will be held below the rate of inflation; and in our everyday lives we will notice all this in reduced or eliminated services. The one thing that will not happen is a reduction in the grand total of public spending. The state will be reshaped; it will not be shrunk. The most important reason is that the ‘comprehensive’ spending review is not comprehensive at all. It omits the really big public spending items, of which the pensions bill is the largest. Technically, it omits what public spending analysts usually call ‘Annual Managed Expenditure’ – the range of current spending on items like pensions and social security which vary annually largely for reasons outwith the control of government, such as the changing age structure of the population. The result is that the forecast level of public spending in real terms (that is, adjusted for inflation) is actually virtually flat over the next five years, and Annual Managed Expenditure will grow because of factors like the rising pension bill. Here politics and the spending figures intersect: one issue few politicians are willing to confront head on is the pension bill, because of the perceived lobbying and electoral power of pensioners.
The announced plans for spending on infrastructure also require careful interpretation. The rhetoric is impressive: ‘the biggest investment in railways since the Victorian era’ – though a pedant might wonder how the Victorian level of investment is being measured to compare it with present intentions. You would not guess from the package of measures announced by Mr Alexander that public sector net investment is set to fall over the next five years as a percentage of national income.
The lesson of this is: in considering public spending announcements always remember that politics lies at the heart of things, and always treat the headline figures with caution.
For any student of public spending the first port of call should be the Institute of Fiscal Studies, the most impartial and expert of all sources of information on these matters. The figures quoted above are drawn from the briefings about the Review supplied by the Institute in the days following publication: see http://www.ifs.org.uk/projects/418