There will only be real cuts in public spending in future years if inflation picks up

 

           I am pleased that my critics now accept that current public spending is rising 2010, 2011 and 2012 in real terms as well as in cash.

           They now say it will fall in real terms in 2013-15. That is certainly what the government forecast says. The latest Red Book figures are for  a fall of 1.1% in 2013 , of 2.1% in 2014 and 2.8% in 2015.

          The same Red Book says that current public spending will rise every year in cash terms over that period. They quote March rather than December year ends. The figures are for a 1.3% increase 2013-14, a 1.9% increase 2014-15 and 1.6% increase 2015-16.

          In other words, the offfical forecast assumesa  big surge in public sector inflation in the second half the Parliament. Roughly it assumes that 2013 will bring inflation of 2.4%, 2014 inflation of 4% and 2015 4.4%. These figures amalgamate a March and December year end as there is no quarterly split provided by the government,but will not be far out.

            If instead public sector  inflation could be held around 1.6% per annum during that three year period there would be no need for any overall real cuts. Wouldn’t that be a sensible aim for policy makers and public sector managers? Why allow such rapid inflation when spending is so tight?

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46 Comments

  1. APL
    Posted April 5, 2012 at 12:03 pm | Permalink

    JR: “Public sector inflation”

    Equals pay rises and better pensions for the cosseted Public sector.

    • lifelogic
      Posted April 5, 2012 at 7:48 pm | Permalink

      Exactly

      • Robert Christopher
        Posted April 6, 2012 at 9:50 am | Permalink

        Europe and the Law of Sticky Wages
        How is wage erosion going to play out across Europe’s Arc of Depression?
        http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9189398/Europe-and-the-Law-of-Sticky-Wages-technical.html

        “You can erode real wages through inflation, but it is nigh impossible to cut them in absolute terms. They are famously “sticky”, as Keynes warned in the 1920s. Call it cultural resistance if you want, or human psychology, or common sense.

        The 500 deflation decrees of Pierre Laval in 1935 led to violent docker strikes in France, with police killings, mass protests and ultimately the electoral uprising of the Front Populaire in alliance with the Communists – at which point, capital flight forced the collapse of the Gold Standard in any case.
        The whole gruelling episode caused by five years of deflation proved pointless in the end. It pushed France dangerously close to conflict, some even say civil war.
        This in a nutshell is what Europe is now doing to a string of countries.
        Why? For What?”

        Yes, you can erode real wages through inflation.

        It has already been done in the private sector in Britain.

        The public sector is another matter!

    • outsider
      Posted April 5, 2012 at 8:07 pm | Permalink

      Worth noting that, according to the OBR, the cost to taxpayers of unfunded public sector pensions will rise from £4.5 billion in 2011-12 to £11.5 billion in 2014-15 and £13.5 billion in 2016-17. They will treble. That is a lot more than inflation. Don’t know how much is down to selling the Royal Mail to a foreign buyer whatever the cost , which is consensus policy of all three parties (sadly also espoused by Mr Redwood) and therefore almost certainly against our interests (cf Afghanistan). No doubt it was advised by Goldman Sachs, or whichever City house is being paid billions to carry this out. Unless the Royal Mail is sold for £150-£200 billion, which seems wildly unlikely, this looks like another short-term window-dressing fix at taxpayers’ expense. Or in this case, on Mr Redwood’s arithmetic, at the cost of equivalent cuts in public services.

      Reply: I do not recall praising the Royal Mail policy. I do recall pointing out that the taxpayer stands behind the Royal Mail pension fund already, whether the business is sold or not.

  2. Nick
    Posted April 5, 2012 at 12:07 pm | Permalink

    How about publishing the true net value of all accrued debts?

    Ah yes, that’s the really frightening figure.

    People might work out the con trick. They might work out their share of the government mess. They might riot.

  3. Nick
    Posted April 5, 2012 at 12:08 pm | Permalink

    If instead public sector inflation could be held around 1.6% per annum during that three year period there would be no need for any overall real cuts.

    ==========

    Only in your dreams.

    Debts of 7,000 bn, tax revenues of 550 bn

    Increase in debts last year, 150 bn for the overspend, 350 bn for the increase of the debt.

  4. Lindsay McDougall
    Posted April 5, 2012 at 12:09 pm | Permalink

    Perhaps both the Government and the Bank of England assume that the QE already made will in the end have an effect. Seems logical. After all, quite a lot of companies and individuals sitting on cash piles are not spending out of fear. When the fear goes ……….

  5. AndyC71
    Posted April 5, 2012 at 12:39 pm | Permalink

    All these government forecasts are made up anyway… none are likely to turn out to be accurate.

    What we do know is that public spending is not being cut in any meaningful manner, taxes are rising, and taxpayer-funded debt is rising inexorably. We’re perhaps driving towards the cliff a little slower than Labour would prefer, but the direction of travel remains broadly the same.

    I’m torn between thinking that Cameron knows what to do but is too cautious to do it, and thinking that he simply doesn’t understand. Either way, it’s become hard to see him as the answer to the problem.

    • Mike Stallard
      Posted April 5, 2012 at 3:49 pm | Permalink

      Like!

    • Robert Christopher
      Posted April 6, 2012 at 9:55 am | Permalink

      Cameron does not even understand that his Masters in Europe do not understand either.

    • The Realist
      Posted April 8, 2012 at 3:52 pm | Permalink

      So on the ball, no guts and no intention to do the right thing! We are seeing a slow train crash, growth lower than expected , an oppressive tax regime and no real cuts in any material way after 12 plus years of explosive government expenditure. Lets start with a white plain sheet of paper, ask what it absolutely required for us to compete globally and protect our nation and you could see our potential expenditure cut by at least 50% plus. Sadly, the only problem as we all know are those totally dependent on the Government providing unnecessary and undermining services. We are, at most, only a few years away from hitting the wall. Time to stock up on tins of spam etc. Joe public has a huge wake up call around the corner as sure as eggs are eggs no politician has the guts to really address the real financial reality that our country faces.

  6. Lindsay McDougall
    Posted April 5, 2012 at 12:49 pm | Permalink

    Where to cut? Roger Bootle, a Telegraph economist, recently highlighted the fact that after the Second World War, government social expenditure was about 15% of GDP. It is now 30%. Does the Conservative Party still have a research department? If so, a task to set it would be to prepare two lists, one of social benefits after the Second World War, one of social benefits now. Then we could decide if the extras were worth it.

    • Winston Smith
      Posted April 5, 2012 at 4:19 pm | Permalink

      The Conservative Party research department has only 3 objectives: political correctness, gay rights and the big society.

      • Alan Radford
        Posted April 6, 2012 at 7:03 am | Permalink

        You forgot the fourth objective – Big State.

        • APL
          Posted April 6, 2012 at 9:58 am | Permalink

          Winston Smith: ” .. big society.”

          A term meaning (Tory party doublespeak) big State.

          It never intrudes into Camerons mind that if the state withdraws from an area, society, that is people, might move into that area.

    • uanime5
      Posted April 5, 2012 at 4:29 pm | Permalink

      What happens if the problems are caused by the pre-WW2 benefits being more expensive as a percentage of GDP? I imagine that rising house prices have raised housing benefit by a large amount.

    • lifelogic
      Posted April 5, 2012 at 7:52 pm | Permalink

      Where to cut – almost anywhere in the state sector would benefit. Even those made redundant would perhaps be happier doing something useful.

      • Bazman
        Posted April 6, 2012 at 2:29 pm | Permalink

        Like picking up their dole cheques and benefits? How would the private sector pick up all the slack and whet of the ones who cannot find work? Should their benefits be cut until they do? That middle manager could always do a cleaning job and compete with Eastern Europeans?

    • REPay
      Posted April 6, 2012 at 1:53 am | Permalink

      The Conservative Party HQ got rid of its researchers to make way for PR people. Too much political strategy since Blair and Brown has been PR led. This explains the confetti like us of funds to buy headlines under Blair or Brown’s use of PR-triggered booby traps like the 50% tax and tax credits or the ghastly Harman’s requirement to measure all legislation’s impact on the poor, women, (the public sector). In short, if you change something for good reason you will trigger our lazy media to auto-attack the change.

  7. Robbie
    Posted April 5, 2012 at 1:13 pm | Permalink

    “If inflation picks up…”

    It already has. Petrol, food, gas, electricity, insurance, postage etc are considerably more expensive than three years ago – most of these have nearly DOUBLED in price.

    But of course, the Bank of England assures us inflation is around four percent.

    John, could you please ask the B of E and politicians of all parties to stop lying. They might listen you but they certainly take no notice of the ordinary person.

    Reply: Yes, general inflaiton is too high and I have often forecast this and asked them to do something about it. I am here talking about public sector inflation, which is currently low owing to the pay freezes.

    • APL
      Posted April 6, 2012 at 10:03 am | Permalink

      JR: “public sector inflation, which is currently low owing to the pay freezes.”

      This type or public sector pay freezes?

      Reply: Indeed – there is some upwards drift in pay and expenses despite the pay freeze – that is another story for another day

      • sm
        Posted April 6, 2012 at 1:21 pm | Permalink

        If you want cuts in the NHS, that’s the place to start.
        £210kpa in essentially a national health charity. Is it really value for money, is it necessary?

  8. lola
    Posted April 5, 2012 at 2:48 pm | Permalink

    Bit confused about this post. What you are calling ‘inflation’ is just spending increases by gummint. This is not ‘inflation’ at all. It is what it says it is – extra spending. ‘Inflation’ is the loss of purchasing power of money by the unwarranted expansion of its supply and the expansion of credit. This destruction of the value of money precipitates higher ‘prices’ on both sides of an exchange, hence ‘inflation’. Troubles start when wgaes in the debased money do not rise as fast as prices – which always happens.

    Reply: If a given level of public service costs £650 billion one year, and the same level costs £660 billion the following, the £10 billion extra is public sector inflaiton.

    • Alan Radford
      Posted April 6, 2012 at 7:04 am | Permalink

      ‘Gummint’ should be spelled ‘Giverment’.

    • APL
      Posted April 6, 2012 at 10:11 am | Permalink

      JR: ” the £10 billion extra is public sector inflaiton.”

      Then Public sector(1) and general economic(2) inflation have two different causes.

      (1) Caused by greater spending. The solution to this is to spend less.
      It’s not ‘inflation’ in the economic sense.

      (2) Caused by (a) either devaluation of the currency causing a large effect for an island economy like ours, or (b) debasement of the currency by the government, AKA Quantitative Easing.

      So in effect the first (1) is not really inflation, more fiscal incontinence, but is caused by the governments inability to control its budget.

      (2 a&b) is really inflation and is caused the governments inability to control its budget.

      Perhaps we need a new government?

      Ah! I forgot the theatre in Westminster isn’t our government, they are just the very highly paid puppets, our real government is in Brussels.

      No wonder nothing changes.

  9. outsider
    Posted April 5, 2012 at 2:52 pm | Permalink

    You make a critical contribution to the economic debate here, Mr Redwood, if only the Treasury and the Bank of England would listen. I realise that public sector inflation is not the same as general inflation but in practice it cannot be much different over an extended period. It is unrealistic to expect public sector workers to have an indefinite pay freeze while consumer prices continue to rise, even at the (to me unrealistic) forecast rates. And social security is effectively index-linked, if only to CPI. Bank Rate would need to rise faster, albeit only to 2-3 per cent, pushing the exchange rate and state borrowing costs up faster. It would make sense for the Treasury to issue as much long-term debt now and then switch to Treasury Bills in the later years.

  10. Mike Stallard
    Posted April 5, 2012 at 3:47 pm | Permalink

    Once upon a time there was a man sitting frozen in his house. He knew that he would die of hypothermia if he didn’t warm himself up. So he took his clothes off and set fire to them.
    For some minutes he was as warm as toast. Then the fire caught hold of the sofa and he had to get up. By now he was really warm. Soon the flames leaped to the ceiling and began to play on the roof timbers. He realised was getting unpleasantly hot. When the Fire Brigade came, their hoses had no effect. The house burned down and he was left standing naked outside, wet, homeless and freezing.

    Just like the 77 year old man in Syntagma Square who shot himself through the head in rush hour yesterday.

    MORAL: Inflation is very easy to start. And very difficult to stop.

    • outsider
      Posted April 5, 2012 at 7:38 pm | Permalink

      A point well made.

    • APL
      Posted April 6, 2012 at 10:16 am | Permalink

      Mike Stallard: “MORAL: Inflation is very easy to start. And very difficult to stop.”

      The other moral we might draw from this story, is that government isn’t moral and to notice that government have been deliberately causing inflation as a tool of its economic policy for the last century.

  11. alan jutson
    Posted April 5, 2012 at 4:19 pm | Permalink

    John

    All this nonesense about cuts, no cuts, slowing the rate of increases, indexed for inflation, RPI, CPI, adjustment for growth.

    They are all smoke and mirrors, designed to hide the truth.

    We are simply spending more than our income, so will the government please just bloody well get on with it, and sort it out.

    The sooner the better for everyone.

    At the moment for every day that passes, we owe more than the day before.

  12. Denis Cooper
    Posted April 5, 2012 at 4:30 pm | Permalink

    The Telegraph has an article today with the headline:

    “Families £500 worse off as tax changes bite”

    I suggest that could be complemented by a second heading:

    “But government still borrowing £9000 per family”.

    OK, that £9000 per family is only a ballpark figure – it’s just the projected gross government borrowing for 2012/13, £166 billion [1], divided by 18 million, roughly the number of families [2)], but it gives some idea of the scale of the problem.

    [1] Page 99 here:

    http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf

    “The net financing requirement (NFR) for 2012–13 is projected to be £166.4 billion …will be met by gilt sales of £167.7 billion …”

    [2] http://www.ons.gov.uk/ons/rel/family-demography/families-and-households/2011/stb-families-households.html

    “In 2011 there were 17.9 million families in the UK.”

    So £500 per family works out as about £9 billion total, just a shaving off the terrifying government budget deficit.

  13. uanime5
    Posted April 5, 2012 at 4:32 pm | Permalink

    “If instead public sector inflation could be held around 1.6% per annum during that three year period there would be no need for any overall real cuts. Wouldn’t that be a sensible aim for policy makers and public sector managers?”

    While a good policy it would require ministers to run their departments efficiently, rather than ignoring problems or giving them to civil servants.

    The buck stops at the top.

  14. Brian Tomkinson
    Posted April 5, 2012 at 4:46 pm | Permalink

    Forget about cuts we all know there haven’t been any real ones just a lot of talk. How about looking at it this way:
    1. Public net debt when this government took office 2010 – c. £760billion
    2. Projected public net debt when they leave office in 2015 – £1365 billion
    3. Increase in net debt £605 billion or c. 80% higher than when they took office
    4. Public current spending when this government took office – c.£600 billion p.a.
    5. Projected current spending when they leave office in 2015 – c. £686 billion p.a.
    6. Increase in spending c. £86 billion p.a. or 14% higher than when they took office
    7. National accounts taxes when this government took office 2010 – £490billion pa
    8. Projected national accounts taxes when they leave office in 2015 – £633 billon pa
    9. Incease in taxation £143 billion p.a. or 29% higher than when they took office.

    Is it any wonder that no one trusts any of the main parties and that those who voted Conservative under the belief that they were the party to sort out the finances were totally deceived?

  15. Andy Man
    Posted April 5, 2012 at 5:08 pm | Permalink

    Straight out of the Failing Government Handbook.
    First overspend to buy votes.
    Second borrow immense amounts.
    Third raise taxes until the proles start to squeal.
    Fourth print money to paper over the cracks whilst endlessly warning about the dangers of deflation.
    Fifth deny there is inflation until it becomes hyperinflation and undeniable.
    Sixth deploy riot police and then army to prevent the mobs employing piano wire and the nearest lamppost whilst ensuring an escape route is available.

  16. Jon
    Posted April 5, 2012 at 8:07 pm | Permalink

    With our ageing population we need to cut the fat that should have been cut 10 years ago.

    We all face higher taxes because of the ageing population, raising taxes to pay for the status quo will not address the higher expenses to come.

    I fear the inflation some might look to is not akin to the post warproductive boom years that ended in the late 1990s. This inflation is tenpered by globalisation so does not come with high earnings increases.

  17. James Reade
    Posted April 5, 2012 at 8:59 pm | Permalink

    Who are “your critics”, and where is the evidence they now “accept” this? As usual, no link.

    For what it’s worth, I’ve never denied this, but I’ve constantly, repeatedly, asked you for your take on the relationship between the public balance and economic activity (i.e. how much is related to our depressed economic activity?), and you’ve never provided anything in return to answer me.

    Reply: I have given you the Treasury’s cyclically adjusted figures!

  18. Bob
    Posted April 5, 2012 at 10:04 pm | Permalink

    Why are we sending money to India if India doesn’t want it?
    What’s wrong with this government?

  19. Alan Radford
    Posted April 6, 2012 at 7:07 am | Permalink

    The government has absolutely no intention, desire or will to reduce the level of State spending. Their jobs depend on it, and being of independent means they need have no concern whatsoever for the real UK economy.

  20. Neil Craig
    Posted April 6, 2012 at 10:24 am | Permalink

    When I enquired, under the FoI Act, why the new Forth bridge costs 8 times

  21. Neil Craig
    Posted April 6, 2012 at 10:35 am | Permalink

    When I enquired under the FoI Act why the new Forth bridge is going to cost 8 times as much in inflation adjusted terms as the last one I was told that there had been inflarion in public building projects of 4% a year above inflation for everybody else, which does indeed come out to 8 times over 53 years.

    So 7/8ths of all government building costs are unrelated to the real building costs.

    When I then enquired why this was the only reason they could come up with was that oil prices rose in the early 2000s.

    The only reasons I can think of for this are a humungous amount of bureacratic padding; a humbungous amount of fraud and thefy; or merely massive amounts of both.

    If there is another possibility I’m sure somebody in government will be happy to give it, but, with the exception of the oil price one, none of them have.

    Since this controls EVERY government built project. getting rid of the bureaucratic parasites and putting all such projects out to competitive tender with transparency pn the bids would seem a useful way of not only ending the rise in government costs but considerably cutting them.

    Reply: The reason for the escalation of government contracts is not usually fraud but changes of specification and requirements, or changes owing to discoveries during the construction process.

    • APL
      Posted April 6, 2012 at 12:30 pm | Permalink

      JR: “is not usually fraud but changes of specification and requirements”

      Which could also be a convenient and accepted way to disguise where the money is going.

    • Brian Tomkinson
      Posted April 6, 2012 at 3:11 pm | Permalink

      Reply to reply
      Or more likely, totally incompetent contract negotiations. After all its not their own money they are wasting and a job in the public sector seems more or less a job for life, regardless of how useless they are at their jobs.

    • uanime5
      Posted April 6, 2012 at 4:25 pm | Permalink

      Neil Craig you might want to look at some commercial building projects. Costs can often vary massively between what was predicted based on tenders from subcontractors and how much the work actually costs.

      This largely happens because of the following reasons:

      1) Unforeseen delays; such as heavy rain, building materials not being delivered on time, some being injured, etc.

      2) Changes to the building plan can extend a project, and often involve removing the existing parts of the building then rebuilding them.

      3) Damage to the building site, for example a fire burns down part of the building.

      4) Something being more difficult than predicted; for example the soil being mostly rock, rather than earth (rock is harder to dig through).

      5) As the main contractor tend to hire the cheapest subcontractors this leads to subcontractors lowering their tenders as much as possible to get the contract. So any problem will lead to a delay and result in increased costs.

      • stred
        Posted April 11, 2012 at 7:27 am | Permalink

        Your points 1,3 and 5 should not result in additional costs to the Employer, in this case the Government. 2 and 4 should be avoided by normal site investigation and careful surveying and checking of all requirements prior to tendering.

        The main reasons for huge increases in the final cost of public building contracts are:
        1. Starting with a negotiated tender based on rates for parts of the work, without properly specifiying the requirements through a fully developed brief.
        2. The client department changing the requirements after starting.
        3. The change, 20 years ago, abandoning fixed price tendering and using the more flexible negotiated tenders. Or, even worse, package deals where the contractor controls the design and tenders on a loose brief. If this method is used, the winning team may be awarded the job on the basis of presentation, or even worse corruption. The contractors may then have allowed for sub standard construction and it will be very difficult for the architect or surveyor, acting as supervising officer, to insist on proper specs and avoid claims.
        4. Contractor’s main aim is to maximise profit and the best way to do this is to have as many variations as possible, preferably on items which are not defined in the contract.
        5. Public service managers either do not realise the above or could not care less, as they extend their own work and it is only taxpayers money.
        6 The huge increase in regulation, increasing specification costs of structure and services together with health and safety on site. This also affects private buiding costs and the latest batch covering thermal performance are the most costly ever.

  22. redmayne77
    Posted April 6, 2012 at 7:12 pm | Permalink

    your article assumes that any deficit will be financed by quantitative easing which will automatically tranlate into inflation on a one to one basis.

    This assertion is not grounded in empirical relaity and is only a monetarist assumption. I suspect that you do not like the idea that quantitative easing could actually work.

  23. The Realist
    Posted April 8, 2012 at 4:06 pm | Permalink

    The problem to me means that something for nothing means a devaluation in value, ie is inflationary. There is no evidence that QE works, in fact there is substantial evidence that it is inflationary. It has been used purely as a social tool to stop the country/ and the establishment having to really face up to the real action needed and the consequences of what Government, BOE and the Banking/Industrial establishment ignored in the 10 years or so of Brown’s deceptive& deceitful ‘Emperor’s clothes economy’. They are equally guilty as are the British electorate who believed such nonsense. In the end we have only delayed the day of reckoning.

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