Public spending – the case for talking about it differently

Throughout all my time in UK politics public expenditure has grown. It has grown in cash terms, and in real terms after allowing for inflation. Whenever we have had a Conservative government Labour has campaigned endlessly about cuts, and has left the impression that total spending was falling when it was rising.

Today we have all three main political parties talking about deep cuts. Yet if you read the Budget forecasts for public spending they show that in every year in the period 2009-2015 public spending will go up in cash terms. Current spending will go up by £90 billion over the period, and current and capital spending combined will go up by £70 billion. There will be a substantial cut in capital spend. The capital cuts were the ones Labour incorporated into their Budget plans just before losing office.

The figures are:

Current public spending 2009-10 £600b
2010-11 £637b
2011-12 £651b
2012-13 £664b
2012-14 £679b
2014-15 £693b

Labour’s case is that these increases in public spending require deep and damaging real cuts. That will only be true if wages and costs in the public sector shoot up by more than 15% over the time period, or if debt interest surges and eclipses everything else. If the Bank gets inflation down to 2% and keeps it there as it is meant to do, there will be small real increases in public spending over the five years on these numbers. They go on to say that they want to slow down the path of deficit reduction. In other words they don’t think we are borrowing enough. They would like more of our tax money to be spent on debt interest.

With tight but rising numbers like these the emphasis has to be on keeping all public sector costs down so the extra money goes further and does not just get absorbed into rising wages and prices. To control debt interest the government does need to reassure markets by showing it is bringing the borrowing under control. It can also avoid a big surge in debt payments by selling more assets to pay for some of the shortfall.

It is difficult to argue sensibly that the pace of deficit reduction is too rapid. On the Budget figures the government will borrow an additional 10.1% of National Income this year, a further 7.5% in 2011-12, and an additional 5.5% in 2012-13. These are huge figures. Our total government debt (measured on the Treaty basis in the Red Book) rises from 79% of GDP in 2012-11, to 84% in 2011-12 and to 86% in 2012-13. Labour’s plans to have a larger deficit for longer would make these bad figures even worse, run the risk of losing confidence in UK government debt which would increase interest rates, and would absorb even more of our tax revenue in paying debt interest.

The Coalition said it would cut the deficit by relying on lower spending for 80% of the deficit reduction and higher taxes for 20%. However, in the first three years of the programme higher taxes do more of the work. 41% of deficit reduction this year, 43% next year and 36% the year after is carried out by higher taxes. The government has to be careful lest its higher rates of Income and Capital Gains Tax result in lower rather than higher revenues, and reduce the growth rate which is important to success.

So why then is there talk of cuts at all? The first reason is the government inherited wildly optimistic plans for increased spending, which have to be cut back to produce a credible budget. The second is Whitehall’s reluctance to accept they can keep costs down and do more for less in core areas. The third is the sensible wish to cut out things that are less desirable or unwanted, from ID cards through regional government to a host of quangos.

The main reason is the continuing absurd political debate we have continuously in the UK about cuts, with parades of inappropriate, worrying or plain wrong cuts in spending in substitute for good public sector management. It was always thus. The figures are more reassuring than the language.

The Coalition government should start to change the way it presents all this. It is worrying some people needlessly about their public services, and it is allowing bad public sector managers to get away with frightening people about the impact of revenue numbers which any business would regard as acceptable and capable of decent management. I see no need for cuts in any public service that matters on these figures. I also expect that when we get to the last two years of the period the government will increase its spending plans still more, as an election draws near.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

29 Comments

  1. Julian
    Posted September 27, 2010 at 8:49 am | Permalink

    It's your party and the coalition which are perpetuating this myth. Why are you finding it so difficult to convince them?

    • DBC Reed
      Posted September 27, 2010 at 12:21 pm | Permalink

      Agreed.The Coalition is stuck with the savage cuts tag and with the reputation for loathing the public sector of which there is customarily much evidence on this message board.

  2. Brian Tomkinson
    Posted September 27, 2010 at 9:29 am | Permalink

    JR: "I also expect that when we get to the last two years of the period the government will increase its spending plans still more, as an election draws near."

    I thought the other day you were supporting the idea that public spending should be brought down to 35% of national income. Doesn't sound as though we shall ever have a government determined to spend the taxpayers' money wisely with a public sector efficiently managed.

    Reply: There may be a difference between what I would like and my forecast of what will happen.

    • Robert Taggart
      Posted September 27, 2010 at 11:50 am | Permalink

      33 % should be the 'goal' ? !

  3. waramess
    Posted September 27, 2010 at 9:56 am | Permalink

    You talk as if the deficit may be reduced over a period of years whilst showing figures that demonstrate the deficit will increase at a rate faster than inflation over the next five years.

    I am puzzled, or is it simply that the intention is the 'rate of increase' in the deficit shall be reduced?

    If the latter then our National Debt will continue to grow into infinity and the Government will slowly squeeze the private sector out of the debt markets.
    This is such a terrible conclusion I can't see why you are implicitly supporting it.

    I can only see that if the Government were to maintain the spending of 2009/10 then the increase would be that of inflation, whereas they are talking of a ten percent increase for 2010/11.

    The Government will always see reasons why their spending will increase and I imagine they will rely heavily on the increase in unemployment argument however, a reduction in spending can only be achieved through a disciplined approach which would seem not to be the ambition of this government.

    On the face of it the Emperor has no clothes, or is there more to it than meets the eye?

    • backofanenvelope
      Posted September 27, 2010 at 10:07 am | Permalink

      I'm with you Waramess. Public spending in total is not being cut at all – just the rate of increase is being reduced. Plus a certain amount of moving the deck chairs round.

      • waramess
        Posted September 27, 2010 at 2:49 pm | Permalink

        The real outrage is that this government talks about reducing the deficit through increasing its income base (taxation) and not through cutting government.
        What is the difference between what we now have and what we voted to get rid of?

    • Posted September 27, 2010 at 10:36 am | Permalink

      The forecasts are on the basis that house prices, commercial property prices, employment, incomes and tax revenues will all grow strongly over the next 5 years. LOL!

  4. Nick
    Posted September 27, 2010 at 9:57 am | Permalink

    What about pensions?

    When you use those debt figures, you are saying that the government doesn't owe civil servants a pension and that you won't pay them too.

    The same is true for the state pension. By not admitting that we are owed the pensions, you are hiding the debt. By not admitting to owing them it's a tacit admission that you are going to default on the contracts.

    After all, you've said NI is for our pensions. We've paid money for those pensions. Now you are saying that you don't owe us a penny back.

    • backofanenvelope
      Posted September 27, 2010 at 10:09 am | Permalink

      We have paid for other people's pensions. Now, someone else is going to have to pay for yours. I believe it's called a Ponzi scheme and is supposedly illegal.

      • Robert Taggart
        Posted September 27, 2010 at 11:52 am | Permalink

        As a life-long scrounger one hopes someone out there has paid for ours !

  5. John
    Posted September 27, 2010 at 10:30 am | Permalink

    How about calling it what it should be, "efficiency" a concept entirely unknown or comprehensible to Governments and Public Service institutions?

    It means, maximum output at minimum cost. More for less, even.

    In business, managers are judged by how little they spend and the savings they make: politicians boast of how much more they spend and that savings (aka cuts) are bad. The public seems taken in by this.

  6. Anthony Scholefield
    Posted September 27, 2010 at 10:45 am | Permalink

    You cannot seriously analyse public spending without considering the national and seperately the government balance sheet..It is the enormous burden of liabilities which is the chief problem- yes debt,public sector and old age pension promises etc. Additionally immigration immediately creates enormous public entitlements and liabilities. All these wondeful 'highly skilled' will need houses roads their share of all public facilities schools hospitals etc.
    Additionally one of the political tricks has been to change their statement of economic activity from GDP to GNP.

    GNP projections will be weaker than GDP because of the outflow of debt interest.

  7. StrongholdBarricades
    Posted September 27, 2010 at 11:41 am | Permalink

    I'm surprised that there are no solid figures about debt interest in this analysis.

    Whilst actual expenditure may be up, it is the surely the increase in interest fees and benefits which are causing the rearrangement of government priorities?

  8. forthurst
    Posted September 27, 2010 at 1:13 pm | Permalink

    What we should be looking at is why the Labour Party continually increases public spending whenever it has the ability.

    What the Labour Party has achieved in thirteen years is to manufacture a far higher degree of dependency, some specifically imported from parts of the world where abject poverty with its concomitant lack of useful skills prevails. It is a mistake to assume that some of the excesses and anomalies that so enrage the readers of the DM were not created by design. It is part and parcel of a process of creating a socialist state by stealth with its central control and shibboleths of 'things you musn't say' where the majority of the population are totally dependent on the state for income ('earned' and unearned) or its supplementation thereof. Many in the Labour Party would look knowlingly if you mentioned 'Common Purpose' or 'Frankfurt School' or 'Cultural Marxism' since these concepts together with a youth spent inhaling the vapourings of Marx and Freud, antipathetic to decent folk, are the toolboxes for the nastiness of the Left.

    So the Left focusses on 'cuts' when in reality they are only concerned about the erosion of state control and the rolling back of the socialist 'utopian' dream (nightmare).

  9. Jan
    Posted September 27, 2010 at 2:01 pm | Permalink

    I'm pleased you are continuing to bang the drum re the supposed "cuts" if only to counteract the hysterics in the media. It is also a good thing to keep pointing out that we pay so much in interest and that we could have so much more for our money if we reduced our debts considerably but that this cannot be done overnight.

  10. Antisthenes
    Posted September 27, 2010 at 2:03 pm | Permalink

    The simple message here is that Coalition cuts mean that more money will be spent on public services than Labour's slower cuts because less borrowing happy markets lower interest rates and less debt to service. Labour's slower cuts will mean unhappy markets higher interest rates and greater debt to service. So Labour's policy will mean more money taken out of the taxpayers pockets and no more and maybe less money will find its way into public services as so much will will be required to service debt. Another more for less.

  11. Sabine McNeill
    Posted September 27, 2010 at 2:43 pm | Permalink

    Yes, yes, number games can be played any time, as long as interest payments keep coming in, as passive income, similar to rent of property and dividends for shares.

    The biggest interest payments come from the Government, for the National Debt.

    Have a look at the last ten years of expenditure and receipts and the GROWTH of interest payments in the 'austerity budget' on http://bit.ly/dthNsG

  12. Trev
    Posted September 27, 2010 at 2:50 pm | Permalink

    On the other hand labours current attacks will turn out to be a damp squib.

  13. Norman
    Posted September 27, 2010 at 3:47 pm | Permalink

    If this post were to be advertised on the side of bus shelters it would truly merit a 'Masterful' followed by five golden stars. I really believe this strategy would strike a good note with the electorate but we have (yet again) allowed the left to dictate the agenda.

    If you get a chance to speak at the spending review you could do a lot worse than having a copy of this post in your hand. In fact, the Chancellor could do a lot worse than have it in his hand when he stands up to give his speech!

  14. Simon
    Posted September 27, 2010 at 4:43 pm | Permalink

    " It can also avoid a big surge in debt payments by selling more assets to pay for some of the shortfall."

    Any excuse to flog the family silver at market bottom to your mates in the City or overseas .

    Just transfer the little which the average man in the street still has a stake in to the elites .

    • Mark
      Posted September 27, 2010 at 10:03 pm | Permalink

      That's why I think we should be selling publicly owned houses: an overvalued asset we can buy back later, and something they can't run off with.

    • Richard Calhoun
      Posted September 27, 2010 at 10:44 pm | Permalink

      The family silver, as you refer to it, invariably means an enormous cost to the taxpayer.
      Examples being:
      Network Rail, the NHS, the BBC

      Break them up and privatise them and the taxpayer will have billions of debt paid off .

  15. Alan Wheatley
    Posted September 27, 2010 at 5:23 pm | Permalink

    I agree a change of presentation is needed. I suggest that a graphical approach would convey the point better for those for whom lots of comparative numbers are too much of a challenge.

    A graph over a five year period should show how one approach results in a better outcome than the other.

  16. Richard Calhoun
    Posted September 27, 2010 at 10:29 pm | Permalink

    " It can also avoid a big surge in debt payments by selling more assets to pay for some of the shortfall."

    I would be interested in which assets you are referring, hopefully the NHS, Network Rail and the BBC

  17. Lindsay McDougall
    Posted September 28, 2010 at 6:35 am | Permalink

    If you strip out inflation and work in terms of constant 2010 prices, public expenditure will be broadly flat during this parliament. This is why, as a % of GDP, public expenditure is projected to fall from 47.4% to 39.8%. I'm not saying that it's impossible to do this without cuts in services but it's difficult. We have though to stick to this containment of public expenditure; it is necessary to reduce the deficit. incidentally, how does the government to get the accumulated public sector debt back down to 30% or 40% of GDP once it has been allowed to rise to 70% of GDP?

  18. waramess
    Posted September 28, 2010 at 12:22 pm | Permalink

    Increases over the period are roughly in line with inflation however, maintaining spending at 2009/10 levels is hardly to be commended, which leaves us reliant on promises of cuts to services which are frankly not likely to happen.

    Cameron has implementsd tax rises through the VAT system to enable continued public spending but is doing nothing to deliver on his promise to stabilise the economy nor does he seem to have a viable plan going forward.

  19. Posted September 29, 2010 at 3:09 am | Permalink

    I agree with you John. The government continues the allow the hard left to run away with the debate on cuts. Talk of a return to victorian England or the destruction of the welfare state when the reality in that spending will fall to the levels of only 2005. Hardly an age of small-government.

  20. Posted September 30, 2010 at 12:04 pm | Permalink

    All these numbers are pretty frightening when you watch how they stack up in real time The point about debt interest is the one that worries me the most. We're borrowing in part at least to pay off our current debts. For you or I that would mean, ultimately, a sad and lonely trip to the County Court to be declared bankrupt. Stretched out to a whole country…?

2 Trackbacks

  1. By In praise of John Redwood | Thomas Haynes on September 27, 2010 at 11:31 pm

    […] is also now an excellent blogger. His most recent post makes the case for a new way of talking about public spending. It is typical of Redwood’s style: accessible, backed up strongly with evidence and […]

  2. […] not least because voters seem unaware for all the ongoing media coverage of “cuts”, as John Redwood MP has pointed out many, many times to an unlistening world, expenditure is still rising and forecast to keep doing […]

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page