Osborne’s target has been reached, albeit two years late. Now is the time to make the case for renewed public spendingby George Magnus / March 5, 2018 / Leave a comment
Chancellor Phillip Hammond will have some good news to spill in next week’s Spring Statement. Recent trends in tax receipts and public spending show the budget balance, excluding pubic investment, in surplus. George Osborne’s 2010 strategy has finally come good, albeit later than he predicted. Many took the news as an opportunity to look back and pillory Osborne for the effects of austerity. But it is better to focus on what to do with the windfall improvement now, and on what we should do to secure the stability of public finances in the future.
The government’s net borrowing in 2017/18 could be a bit less than £4bn. To put that in perspective, that’s more than £10bn better than estimated last November, about £6bn better than in the previous fiscal year, and the lowest since before the financial crisis. The government will probably want to make hay out of the small surplus in the “current” budget (excluding public investment), which has emerged two years later than planned.
To achieve that, George Osborne raised VAT and kicked off a squeeze on public spending, which has fallen sharply in real terms. The sharpest cuts in public spending occurred in the first two years of the coalition government, tapering a bit afterwards. In the decade to 2020/21, on current plans, there will have been real cuts of between 10 and 40 per cent in all major spending departments, except for health and overseas aid. Even so, NHS spending as a share of GDP is slightly lower than it was before the financial crisis. Osborne’s defenders remind us that at one time the government was running a “current” deficit of £100bn, which with public investment added in was near to £150bn, or 10 per cent of GDP. They argue the government had no choice in its actions, which is not strictly true. There were important timing and distributional choices. In other words, choices over the point at which to begin serious deficit cutting—given that the economy was in poor shape with much unused capacity—and how to share the burden.
One vocal critic, the economist Simon Wren-Lewis reckons the government’s strategy has cost the economy about 15 per cent of GDP, or roughly £10,000 per person on average. No economist suggests that it had no cost, but they do argue about how it was distributed, and whether it disproportionately targeted young people and people on lower incomes. This wasn’t the only cost, though. Austerity in part created the public disillusion and alienation that contributed to the UK’s decision to leave the European Union.
“Osborne’s defenders remind us that at one time the government was running a ‘current’ deficit of £100bn”
Next week, the Office for Budget Responsibility will opine about whether the rise in tax receipts is permanent or temporary. Some is thought to have been due to the timing of tax receipts related to taxes on dividend income introduced in the last fiscal year. Yet there has been an upward shift in corporate, PAYE and National Insurance tax receipts, which suggests that the better than expected performance of the economy is playing a role here. This is of course welcome, and buoyed by the slightly better productivity growth data in late 2017. But we shouldn’t yet count our chickens. It’s too early to judge what is going on with productivity, and the unpredictable course of the Brexit negotiations and politics in the UK will loom over the economy for a considerable while.
We know that next week’s Spring Statement will be a low-key affair with no major announcements expected. This latest news doesn’t change that. For the time being Hammond is likely to continue to adopt a steady-as-she-goes position. He may distrust the improvement in the fiscal numbers, and in general leave himself some room for manoeuvre in the next year or two if the circumstances of Brexit should so require.
We should beg to differ. There is a decent case for unexpected or windfall improvements in tax revenues to be seen as a bonus and allocated to public goods and services, for example the NHS. As it is, deep cuts in some public services remain in the pipeline, especially affecting justice and work and pensions. Last November, the Institute for Fiscal Studies reckoned that there would be about £12bn in welfare spending curbs by 2020/21, and that the NHS would face its tightest funding period since the 1950s.
In any event, Hammond’s current public finance questions are a rounding error as far as the future is concerned. By 2020, we will be at the start of a long march in which age-related public spending is predicted to rise significantly as a share of GDP. We will have to make difficult and perhaps even radical decisions about who will pay and how much for the age-related public spending we all want.
The government should lead a grown-up debate across the nation about the entitlement rights and obligations of citizens and the state, so that we can all ponder the costs of pensions, healthcare and residential care, and the national coping mechanisms we need to develop to accommodate them. We must have a discussion about a broader tax base, maybe an NHS tax as I argued here, entitlement benefits for those who have resources to pay more, and other funding options.