Why are there cuts when spending is going up?

Only in the public sector is an increase a cut. The current debate over public spending is bogged down in the parade of the bleeding stumps, arguments over 25% cuts, and an argument over allowing the health budget to rise when most else is set to tumble.

So let’s try again. Total spending will go up by £68 billion over five years. That’s a much slower rate of growth than we have been experiencing in recent years. Some of that increase will be gobbled up in higher interest charges as the state continues to borrow on a large scale. It is not, however, the end of the world as we know it. There does not need to be a cut of 25% or anything like it in any public service which matters. It may require more than 25% cuts in spin doctors, bureaucracy, silly jobs, regional government and the rest.

The big question today should not be about allowing Health an increase in spending. Health is not going to do that much better than spending as a whole, and does face extra demand as the population gets older and as more treatments and drugs become available. The big question is why are there cuts when spendign is increasing? How do we do more for less in all areas, including health? How do we get the public sector to live in the real world, where modest cash increases are sufficient to do a good job and to keep everything that needs sustaining?

Technically running all the key public services for the £700 billion on offer should not be difficult. Politically it will be very difficult, as most of the public sector still thinks it needs to argue for more money at every turn and threaten the worst possible consequences if it does not have its way. The politicians have a duty to lead the debate with new language. They need to use the cash figures at every available opportunity, and get across that this is a tight but not a cruel or unrealistic settlement. They need to find public sector maangers with a “can do” rather than a “you must pay attitude”. They should conclude we need fewer public ector managers, and ones with a very different approach.

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28 Comments

  1. davidncl
    Posted June 28, 2010 at 8:11 am | Permalink

    Unless you can somehow alter the “progressive” cultural world view – which is largely manufactured by an unholy alliance of pressure groups, fake charities and the BBC – then the coalition is doomed to fail.

  2. Simon
    Posted June 28, 2010 at 8:28 am | Permalink

    As I have said here before, there is so much that can be done, waste just crying out to be sorted out, projects comfortably running along requiring millions of funding delivering little.

    I do not detect any genuine realization of our predicament, let alone the sense of relish at getting to grips with our costs, the sense that it is time to get real and that it will make our work much more satisfying, more honest, more imaginative.

    if we keep doing the same old things in the same old way then it will go badly for us!

    Still me and the team I lead have a meeting on Wednesday to look at ideas for savings and we shall post our ideas on the new official web site, we are still hopeful. The pace needs to increase though!

    When will the Government make it's new IT Policy official?

  3. Norman
    Posted June 28, 2010 at 8:34 am | Permalink

    I've always been critical of the ringfencing of budgets (especially the NHS) and it's not that I don't realise the population is aging, etc. but it's that we are starting from a position where the NHS has been lavished with money for the last 13 years and is completely bloated (third largest employer in the world, best paid National Health staff in the world). I'd be interested to learn how much spending on NHS increased under Labour. I bet it would be frightening and nothing like what GDP has risen by.

    I'm sure there are good reasons to say 'We'll stop the wasteful spending so that we can spend the money on other areas in the NHS' but I'd rather the government said 'We'll stop the wasteful spending and then look at what is the best use this money can be put to' – whether that is more spending in other areas of health care, reducing deficits, making cuts to other departments less, or a combination of things, it should be decided on the merits of the thing, not blanket statements.

    What the NHS really needs is broken up and reformed, not simply feeding the behemoth every increasing sums of our money. We've tried that and we've failed miserably at it.

    It's good to see welfare reform being tackled seriously (or spoken about at least), let's hope in a few years time the government will have enough confidence to tackle health in the same way.

  4. Alan Jutson
    Posted June 28, 2010 at 8:36 am | Permalink

    John

    A number of people who we know who work in the NHS have been saying for many, many, months, that the NHS had already been operating budget cuts in the last financial year, with staff who were leaving not being replaced etc.

    Budget cuts I am informed are taking place this year as departments are being asked to trim budgets.

    So why cuts, when it would seem overall spending goes up.

    One is forced to ask the question. Were the NHS Trusts working within their set budgets in the first place, or were they overspending by such a huge amount, that to work within an increased budget still meant cuts to the previous over expenditure.

    Clearly questions need to be asked, a proper audit taken, and accountability restored.

    It would seem that Public Services have lived in a non competitive dream world for too long.

    • AndrewSouthLondon
      Posted June 28, 2010 at 7:42 pm | Permalink

      Well spotted Alan. The majority of trusts are still trying to clear historical cumulative deficits. My three local Trusts each have around £30m deficit resulting from years of continuous overspending. Trusts are required to balance their income and expenditure, "taking one year with another", meaning they don't get let off their overspend. They have to get back into balance AND repay the overspend, over time. This results in three-year recovery plans which routinely get rescheduled because they never delivered.

      In the past, balance was often acheived by a non-recurring windfall, like selling off part of their land for housing development, and the appointment of "Turnaround Directors" usually overpaid nitwits from the management consultancy world, who immediately place a ban on ordering inkjet cartridges and stationery (needed to send patients letters).

      Hence there are constant "cuts" in daily operating whilst the NHS overall budget has apparently been increased.

      But do you think any journalist understands such things? Whats the qualification required to be a health correspondent, remind me?

  5. Geoff not Hoon
    Posted June 28, 2010 at 8:48 am | Permalink

    Mr.Redwood, perhaps the old expression that success comes in 'cans' not cannot's needs to be applied. Also, why do governments not wake up to the talent, brains, wisdom and experience in the UK's active retired folk who would fill some of these posts for a fraction of the current cost.

  6. Brian Tomkinson
    Posted June 28, 2010 at 9:16 am | Permalink

    In an earlier posting I asked the question "when is a cut not a cut?" and answered with "when it is a cut in government spending!". I must admit that I was surprised when you first disclosed that spending in cash terms will increase by £68billion over five years and it has been bothering me ever since. What concerns me is the way taxes have and will be increased when we were told that the focus was going to be on spending cuts. I read in the press that "non-jobs" are still being advertised at high salaries. Clearly there has been no freeze on recruitment. Do politicians really have the determination to tackle this over-spending or will they always opt for the option of increasing tax?

  7. Javelin
    Posted June 28, 2010 at 9:31 am | Permalink

    Sitting here chatting in the investment bank nobody I speak to believes the Con-Lib Government is capable of making the cuts necessary to stop Gilts coming under pressure. I think they will try but the (1) costs of redundancy (2) lenient outsourcing contracts (3) resitance by senior civil servants (4) lack of private sector jobs (5) Government job contracts etc, will just make the cuts impossible.

    The Government may be able to put off the markets until next year by kicking up a dust cloud about real and relative cuts – but the markets won't hold back for more than a year. I can see rising interest rates from inflation and rising taxes from lack of cuts pressing down on the UK economy for the next 5 years.

  8. Acorn
    Posted June 28, 2010 at 9:50 am | Permalink

    I am aware you have had criticism for quoting cash sums that show a 10% rise in spending; circa about 1.9% a year compounded. In inflation adjusted terms, that will be a reduction of about 1% a year. Try explaining that on the doorsteps of England. If the number is getting bigger then the spending is getting bigger; is the response you will get from the voters.

    This year, per household, we will pay out circa £4,800 on health; £3500 on education; £4800 on welfare; £3100 on state pensions. Out of £28000 per household total government spending, which will be half our market price GDP of £56000 per household. Each household will borrow £6200. Frightening!!

  9. StrongholdBarricades
    Posted June 28, 2010 at 10:07 am | Permalink

    Surely it becomes "cuts" if you allow the actual truth to be drowned out by all those interested groups.

    Otherwise it is just politics, or sematics

  10. nonny mouse
    Posted June 28, 2010 at 10:11 am | Permalink

    The total increases because of inflation, which increases welfare payments, payroll (assuming it rises after the two year freeze) and debt interest payments.

    Total spending could increase because of rising unemployment, but I'm not sure if that is factored into the OBR estimates. This could factor out some of the effects of inflation (higher unemployment = lower demand = lower inflation), although the delay in this mechanism could hide it.

    All this is dependent on interest rates. If inflation takes off then interest rates rise to reduce it. If the housing sector booms it could also need an interest rate rise, or we need to find a better way of cooling the market. Interest rates also directly effect the debt interest.

    Raising interest rates would mean a higher pound, which in turn would harm export growth, reducing demand and GDP growth, feeding back into unemployment. My head is starting to spin with all the feedback mechanisms involved.

    Whatever happens, the BOE is going to be the most important part of getting the economy working effectively, in both monetary policy and bank regulation..

  11. Lucy Parfait
    Posted June 28, 2010 at 10:18 am | Permalink

    My question is why are there tax increases and benefit cuts when spending is going up? The net effect is that the public sector gets off the hook with a series of dire predictions of massive cuts when in reality the gravy train continues with the lightest touch on the brakes. Meanwhile everyone that actually produces things or services of value get mugged again.
    Hang on- I've thought of another question!
    Why does anyone that can emigrate not do so?

  12. david b
    Posted June 28, 2010 at 10:38 am | Permalink

    I am a bit alarmed. When I heard the budget I thought it might be OK, but as the days go by, and the bloggers like "burning our money" and yourself begin the slow process of critical analysis, I grow more alarmed.

    The interest bill is going to be huge if we don't cut the credit card up and get rid of the debt. I run my household affairs with the conviction that interest paid is wasted money. I remain unconvinced our shiny new government is going to fix this mess.

    And in the new age of austerity, how many fewer staff accompanied the PM on the Toronto junket? Did everyone camp at the British Embassy or pay rack rate at the best hotels in town? Indeed, are we such a global super economy that we need to be at G8 or G20 junkets at all?

  13. michael read
    Posted June 28, 2010 at 12:28 pm | Permalink

    Fingers crossed that the LibDems are content to sing your tunes.

    And fingers crossed that a double-dipper is not around the corner.

  14. English Pensioner
    Posted June 28, 2010 at 2:53 pm | Permalink

    Government departments are not the only organisations that use this convoluted language "an increase is a cut". I remember as a Civil Servant dealing with a well known engineering contractor and pressing them to meet the contract in all respects. They complained to my bosses that I( was going to cause them to make a huge loss on the contract, when what they meant was that their profits were not going to be as huge as planned. So for them a (small) profit is a loss!

  15. Javelin
    Posted June 28, 2010 at 3:06 pm | Permalink

    BIS today highlighted the few very important point that there is a danger we will become addicted to the drug [of low interest rates] needed to keep the patient [UK PLC] stable whilst in intensive care[the credit crisis]. However staying on this drug presents the high risk of asset bubbles and unprofitable investments.

    I would add to that low savings levels and inflation as we come out of recession.

    It is clear that interest rates need to gradually rise back up to long term levels.

    • StevenL
      Posted June 29, 2010 at 3:01 am | Permalink

      You mean the drug of high house prices and serviceable debt on the back of them surely?

  16. James
    Posted June 28, 2010 at 3:36 pm | Permalink

    Please can we do away with the unfair subsidy by English taxpayers of the Scots under the Barnett formula?
    The Government has again confirmed its intention to retain free bus passes for pensioners. This is really unfair to us rural pensioners miles away from (poor) bus services and the shops. It is also unfair to Council Tax payers in the South West who subsidise holidaymakers' travel.

  17. Stuart Fairney
    Posted June 28, 2010 at 5:10 pm | Permalink

    Call me a drooling libertarian if you want to, but it seems to me that if you know there will be an all mighty hue and cry about cuts regardless of reality, you may as well actually make cuts and be tories not social democrats.

    Farage was sadly right. We have (admittedly better) different management as opposed to real change.

    • waramess
      Posted June 29, 2010 at 9:07 am | Permalink

      ..and they are managing a decline.

  18. Andrew Johnson
    Posted June 28, 2010 at 7:30 pm | Permalink

    Dear John, another thought provoking blog. Here's what I would like to see the coalition do urgently:-
    1) Introduce one accounting period for all government and local government departments. Everyone, everywhere would know where they were, especially the Government.
    2) Abolish the current practice of reducing a department's budget if it does not spend it in the accounting period. (Just ask anyone who supplies Government or LEA about the frenzy of ordering before "end of the year") In the private sector bonuses are often awarded if spend is kept below budget. Huge sums are involved here. I cannot over emphasise how much is being wasted nationally.
    3) Introduce budget allocation by need not spend. This of course requires management who know what the purpose of their department is. The coalition needs to make sure this happens.
    4) Staff levels to be set according to the numbers needed to fulfil the department's purpose. So no 10% cuts across the board. Some departments might need 100% more and others reduce by much more than 10%.

  19. billyb
    Posted June 28, 2010 at 8:31 pm | Permalink

    Well if you can publicly show a truly significant amount of "spin doctors, bureaucracy, silly jobs, regional government and the rest" then its job done – the public will surely agree with you. Everyone suspects this waste exists, but no-one knows the real size of it.
    Publish!

  20. Glyn H
    Posted June 28, 2010 at 11:01 pm | Permalink

    My partner spent 28 years in the public sector and was the only non Oxbridge graduate in the management of her quango. I have spent all my life in the private sector. Most of her collegues were on £100k pa plus and were wildly incapable of earning 1/3 of that in my world. A bonfire of these RDA/regional government/NHS trust target setters and miriade others is required NOW. If it is not done in these early days of the new Government all will be lost. Mrs T failed to sort out the tax and benefits mess in 1987 and Mr Brown got in his huge socialist Tax Credits system as a result. It must be done now.
    Also none to happy that pre budget leaks are pure Brownism; and Spads are re-appearing. We neeed a return to trust in the process of proper Government. At this rate we will be back to not sacking Irvine so you seek to abolish the Lord Chancellorship; or not sacking Brown which lead to this choas.
    Cameron must seize his chance; Blair failed – time is limited to do what needs to be done and restore credibility and integrity to UK plc

  21. Martin
    Posted June 29, 2010 at 12:47 am | Permalink

    There is clearly some scope for cuts in the law and order budget :-
    http://www.independent.co.uk/news/uk/crime/office

    I can't see why all departments can't have at least a modest cut. Any organisation which has had huge amounts of cash thrown at it gets a bit bloated. Government departments should be told to deliver the same service with less money.

  22. StevenL
    Posted June 29, 2010 at 2:58 am | Permalink

    So the 'cuts' depend on inflation (in the tax take) to reduce the deficit? Japan here we come!

    Thank you everyone that wanted house prices to rise at 20% pa forever. Welcome to reality.

  23. backofanenvelope
    Posted June 29, 2010 at 6:47 am | Permalink

    I wish the Tories would make up their minds. Either we need serious cuts or we don't. The only way to make these cuts is to stop doing things.

  24. Javelin
    Posted July 1, 2010 at 7:37 am | Permalink

    An interesting point there were 1.7 million Government jobs created under Labour and 1.4 million were filled by immigrants (ONS) and we are going to lose Up to 750k public sector jobs.

    We are to create 2.5 million new private secrtor jobs in a recession yet only managed a million during a boom.

    90% of new womens jobs were with the Government. There are already a million young people out of work. 80% of graduates can't get jobs within 6 months that will start to pay back their loans.

    I really think the Government sector deficit is not just financial but has been used to paper over a systemically failing nation.

  25. Lindsay McDougall
    Posted July 3, 2010 at 7:40 am | Permalink

    It is indeed going up. Is that £68 billion increase in terms of current prices or constant prices, because only the latter makes any sense? To see clearly what is going on, always strip out the inflation.

    Before the election, I calculated that the government would need to get public expenditure down to 38.5% of GDP over the course of the parliament in order to fulfil its manifesto pledges. The target is now 41%. Is this the result of coalition politics or is there some other explanation – such as the difficulties caused to other government departments by ring fencing the NHS and foreign aid?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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