In the year to March 2011, the first year of the new government, current public spending rose by a little over 5% in cash terms. Contrary to all the stories of big cuts to come, it will continue to rise in cash terms for the rest of the 5 year plan.
There are two things to note about the rises. The first is, the rises are biggest in the early years, and toughest in the later years. The second is, the government increased planned spending for later years between the June 2010 and March 2011 budgets, showing the figures are not cast in stone.
The pace of the increases is curious. On the red book figures curent spending rises by 5.3% in Year 1, 3.8% in Year 2, 2.0% in Year 3, 1.9% in Year 4 and 1.8% in Year 5. I can understand lower figures for the middle two years of the strategy, as these are the years of the pay controls, and the years when the full benefits of buying better and cutting bureaucracy should be materialising. The last couple of years when the pay freeze comes off and the government is in the run up to an election you would think might be years of faster growth in current spending than 2011-13.
The substantial increase in Year 1 is also surprising. I appreciate it takes time to get on top of programmes, and some expenditure was contracted in advance by the outgoing government. It is usually best when undertaking a financial turn round to hit spending from the very beginning. It is easier to relax your grip than to come back for a second round of reductions in plans.
The other curious thing is that the public sector scores these cash increases as real cuts. As inflation is meant to average just 2% on the government’s own target whilst the spending increases average 3% you would have thought this would represent small real growth. When you add in a two year pay freeze for most public sector pay, better buying, and a big back to work programme to take people off benefits you would hope that a 3% per annum increase in spending would get you some real increases in service.
It is true that interest payments go upwards as a result of the extra borrowing. This only squeezes other spending badly if interest rates take off, not something assumed in the forecasts.
May 23, 2011
All looks set for clinging on until the grim end and loosing the election in May 2015.
No functional banks, a mad energy policy, over tax and waste, over regulation everywhere and Labour from 2015 – and they wonder why there is so little confidence about.
May 23, 2011
And now, as if there were not enough taxes already, I hear of yet another new back door tax and gross imposition on the public. The new fines for not insuring a vehicle (one you are not using that is on your land and does not need insurance).
Doubtless these will be organised, like the SORN V.E.Duty system to ensure maximum inconvenience and failure to comply and thus generate much fine revenue from the law abiding but over busy workers and yet more pointless jobs for the parasitic sector.
Yet another good kick in the teeth for growth, the private sector and the hard working from Cameron!
May 23, 2011
Lifelogic
Makes it even more complicated for classic car owners who only use their vehicles for a limited time each year, and thus tax and insure them accordingly.
Note: I am not a classic car ownr, but do like to see them on the road from time -time to reprsent our HISTORICAL PAST MANUFACTURING SKILLS.
May 23, 2011
Indeed might be good to have a promising future too at some stage.
May 23, 2011
It’s not Labour winning in 2015 that I so much fear but it’s that the coalition are not dealing with the underlying problems in the economy as you indicate.
When it all starts to go pear shaped, as it must, people will unfairly blame right wing policies for the mess when there hasn’t been a fiscally right wing Chancellor for over 20 years.
When that does happen let’s hope that the Tories don’t repeat the mistake of thinking that they have to deconaminate the brand and adopt the language and policies of the left to be electable but that we’ll get a principled leader who knows what s/he’s doing and can convey that message to the country.
May 23, 2011
The banks still seem to be claiming again today that they cannot meet lending targets as business does not want to borrow. If the government believes that they will swallow anything.
Interestingly the government owned Natwest/RBS is perhaps the worst offender here trying to claw back as much as it can everywhere it can and from perfectly good customers.
Reply: The Regulators are demanding that the banks improve their balance sheets, so that means less lending.
May 23, 2011
To your reply –
Yes indeed bank regulation is forcing the banks to reduce lending but the government is still pretending they are encouraging them to lend. The problem is that pulling money back from sound businesses just makes things even worse.
The UK urgently needs the private sector to expand. This needs, confidence, fewer regulations and a smaller state – when is Cameron going make a start and inspire some confidence.
If not we might as well have a proper Liberal/Labour socialist government and a least the possibility of a sensible government after the next election. Rather than nine more years of bad government that is now in prospect.
May 23, 2011
Looks like we have the worst of both worlds a state owned bank run by private bankers. As they are owned by the state, your point of them leaving the country has turned to dust and as the bankers themselves got us in this position they can leave as they are no good at their job and should have been sacked. The banks then run by competent people for the benefit of business, the state, savers, borrowers and the shareholders. Not just an elite few who we are all ‘envious’ of whist they rip everyone off with their insider companies. Could apply to many other ‘private’ and state owned companies. Starting to get it now Lifelogic?
May 23, 2011
As a banker, why would you lend to a risky little business, when you can lend to the government with the principal and the interest payment guaranteed by the taxpayer?
As a government, why would you want the banks lending to risky little business, when you really want them lending to the government via the Debt Management Office.
As Merv King, why would you worry when you can print money for both of the above counter parties to keep the money-go-round spinning.
As a taxpayer, why would you think that all three of the above are taking the piss out of you?
May 23, 2011
I learned yesterday that Michael Gove has been lobbied by the National Secular Society (hat tip Cranmer). That is why he has banned “Creationism” from all Free Schools.
And that set me thinking.
How, today, do politicians (apart from yourself) know what their voters are thinking? No longer do they have a party membership in the provinces. No longer are they able to mix freely with the plebs. No more soap boxes and sudden speeches among the jeering, heckling crowds. The Party money, after all, comes either from huge donors or else the TU movement, not from the voters and supporters.
Do they really just sit in their offices waiting for the next delegation from Lobbyists Incorporated? And, in the meantime, watching TV where the BBC tells them about the latest shroud wavers? – Oh and perhaps a little flirtation with the Interns too?
Michael Gove has been seriously blown off course and his promises are now memories.
I suspect that the same could well be true of the others. Lots of assumptions and head nodding as the (Labour) Civil Service gets its own way.
That would certainly account for the sheer inefficiency of the cuts. Meanwhile the country drifts deeper and deeper into the debt that is sucking the money out of the inefficient taxation system.
Reply Sensible politicians knock on doors in their constuencies, read the incoming emails and letters, keep in touch through web and press – there are many ways of feeling the pulse. Top politicians these days tend to rely greatly on polling.
May 23, 2011
I am increasingly shocked at the absurd beliefs (particularly the green and big state agendas) being pushed into our children at schools. The children seem unable to question it or see through any of it. But then the nonsense is coming at them from all directions the BBC, from Schools, from Hollywood and from the Governments.
It takes courage and intelligence to question it all and not just follow the fashion and it is rarely socially rewarded. Being right before your time is rarely a popular stance to take especially if it is not a caring, sharing, socialist equality agenda.
May 23, 2011
Science should be taught in schools not myths. Far too much much money is wasted on Religious Education in this country. It is vital the education system deepens its teaching of Science and Maths for our future prosperity. I bet the Chinese don’t waste their education budget on myths.
May 23, 2011
So why is David Cameron and his “top” team so unaware of the things that matter to people in this country? Real cuts in the public services should be going on, not increases as you have highlighted. When are we getting our in/out referendum on the EU? Changes to the CAP and fisheries policies? Reductions to the minimum/nil for Foreign Aid, Human Rights Act, mass migration? Right of recall for constituencies where their MP isn’t performing e.g. Gordon Brown?Etc Etc
May 24, 2011
Mike Stallard: “The Party money, after all, comes either from huge donors or else the TU movement, not from the voters and supporters.£
Solution – one member one subscription. No other donations allowed. Now of course the membership lists would have to be open to audit, because you know what politicians are like.
May 23, 2011
Inflation only reduces debt when WAGE inflation goes up. Rising cost inflation INCREASES debt. We live in a world of stagnant or falling wage inflation and rising cost inflation.
I can only assume the Government expects total employment to go up. But from what I see most of the new jobs are part time and low paid.
May 23, 2011
Very good point, IMO. [ We’re facing heavy stagflation, at best. ]
May 23, 2011
We are inundated with media reports (particularly the broadcast media) on a daily basis about the ‘cuts’. If interest charges don’t account for it, just where is the extra spending going – international aid, the EU and the NHS? Which departments are actually spending less cash this year than when Labour was in office? Is this talk of cuts just a diversion from the truth, that whatever reduction there is to the deficit will be achieved by higher taxation not less government spending? Do you really think that your party will be re-elected after increasing the stated government debt by at least 50% in 5 years and leaving interest charges of at least £60billion per annum? It doesn’t sound like a good legacy to me.
Reply: Yes, the priority areas for increases include health, EU, overseas aid and schools. Interest costs do also rise.
May 23, 2011
To reply – increases in all the areas that could manage with lower spending where they run efficiently.
May 24, 2011
Yes and interest costs could rise dramatically if we do not 1) actually cut total expenditure in cash terms materially, 2) raise interest rates, 3) cut taxes as the growth in revenues that Osbourne is so dependent on are realistically going to fall short with the consequence that the deficit reduction will be much slower and the total outstanding Government debt will continue to grow to stratospheric hights!
May 23, 2011
Whilst I understand what the government are doing (more tax, more inflation, few spending cuts) I simply do not understand why they persist in the myth that they are being tough on spending .
Further, I do not understand why the media have latched onto the cuts, cuts, cuts mantra when it is so obvious that the huge cuts spoken about, simply do not appear to be happening to any degree of scale.
Your comment about starting tough and then relaxing (if possible) is better than to keep on having to go back for more savings is spot on. The Conservative Party had 13 years to prepare for their turn in office, they should have hit the ground running. Aware that the Lib Dems are a complication, but for goodness sake, surely not that much of a complication.
Unless the comunication from Government changes, it will soon get a reputation of cuts, cuts, cuts, a medicine which has not reduced the deficit, done nothing to reduce our debt, an so was all a waste of time.
Given the way peoples disposable income has been reduced by increased taxes, I will be amazed if the suggested growth figures materialise, and if they do not, then all of the calculations are simply pie in the sky.
May 23, 2011
Put like that it appears we are landed with another government that relies on smoke and mirrors as a substitute for hard policy to match our hard times. The blathering MilibandE, when he appeared on BBC Breakfast this am, literally offered nothing except a tax on bakers bonuses which, he implied, would provide the money to build more houses and end youth unemployment. We are ill-served by the present generation of so-called political leaders in charge of the nation`s affairs.
May 23, 2011
Yes E Miliband sounded moronic this morning on TV – you cannot help thinking that there is some correlation between people who do PPE at Oxford and Economics at the LSE and being totally out of touch with the reality of the way the world actually works.
May 23, 2011
Government spending increases are compound.
It is always nice to see the raw figures as well as the percentages.
May 23, 2011
Clearly, to the government and civil service, many words have entirely different meanings from those in any normal dictionary.
To the Civil Service, a “cut” is not getting as bigger rise as expected, an “increase” is only an increase if it is substantially more than that due to inflation. “Staff reductions” are not getting the extra staff that were anticipated; “Re-scheduling” usually means postponing; the list is endless.
Of course this language also applies in industry, I remember running a contract with a company and insisted that a number of minor problems were corrected and was told that I would be causing them to make a loss on the contract. In fact what they meant was that they would not be making as much profit as they had expected!
Perhaps there is a market for someone to produce a dictionary of “Government double-speak”.
May 23, 2011
“This only squeezes other spending badly if interest rates take off, not something assumed in the forecasts.”
Aren’t interest rates planned to return to 5% later this year, or at least next year?
Reply The official forecast is for gilts to move from an average 3.8% today to 4.9% by 2015
May 23, 2011
(Refers to a site which claims that public sector tenders are too costly and complicated, excluding smaller more competitive businesses from competing-ed)
And then we hear last week about how expensive the railways are to run compared to continental Europe.
Is there any will to seriously tackle this?
I don’t mean trimming a few regulations around the edges, but removing the barriers which stop small efficient business getting public sector contracts.
Too many vested interests I suspect.
May 23, 2011
If public spending goes up, but tax revenues do not because of the weak economy, then borrowing and then tax rates will have to go up. I was struck by the tax burden the other day when seeing an itemised bill for fixing my oven. Cost of a new heating element = GBP 30. Cost of engineer’s call-out charge, GBP 55. Total = GBP 85. Added to that was VAT of 20%, giving a total of GBP 102. To pay out GBP 102, a taxpayer on a marginal income tax rate of 25% would have to earn GBP 136, one on 40% GBP 170 and someone on 50% would have to earn GBP 204. Let’s say the company pays a corporate tax rate of 25% and makes a margin of 20% on goods and labour it provides. It would pay GBP 85×20%x25%= GBP 4.25. Let’s say the engineer who did the work ends up with half of the GBP 55 call out. If he pays a marginal tax rate of 25% that would be GBP 6.90 and if a marginal rate of 40% it would be GBP 11. Therefore at the headline level and depending on the marginal rates of tax involved, the tax man could have received up to GBP 134 for a job that actually cost eighty five quid. (To that you could add the duty raised on the fuel used to send the engineer out and the myriad extra taxes associated with running a business.) It is hardly surprising that the economy is so sclerotic when the tax man takes one and a half times the value of what should be a mutually beneficial economic exchange between two market participants (i.e. me and the oven company). Tax rates need to be cut and the state needs to get a proper grip on its spending habit.
May 24, 2011
Quite right I like to think of the tax paid on the loop of money going from worker back to worker. With all the taxes considered employer and employee NI, Tax, VAT, fuel duty, VED and the rest. Often unless your Oven man is about three times faster at doing the work than you are (including his travel) or earns less than a third of what you do you. You are better to do it yourself. So while it should be more efficient to have the expert to do the job it often is not due to the absurd loop tax levels. You thus end up with a far less efficient DIY/barter economy.
The government has a plan on this though they just ban it. Often on ground of “health and safety”, banning you from doing DIY as with gas, electrical wiring, childcare etc. unless you have the “right” (as they see it) training and specific pieces of paper from approved bodies.
May 24, 2011
One measure of civilisation is the extent of the division of labour. The more labour is divided the more prosperous an economy it is likely to be. Anything that discourages the division of labour – such as onerous taxation and the stimulus of barter – serves to diminish prosperity.
May 23, 2011
Everyone thinks that there have been huge cuts in public expenditure thanks largely to the daily diet of mis-information spewed out mainly by the BBC but also by other Broadcasting and newspapers outlets. There is no real questioning of local authorities, the police etc. as to why proposed cuts almost all involve front line services (which should have been ring fenced to present this obvious political ploy) Why the Government cannot counteract this propaganda by efficient PR and seriously take up the breaches of impartiality by the BBC is beyond comprehension. Would Alistair Campbell have been so complacent about the national broadcaster openly supporting the Tories and giving a one sided version of the Labour Government’s programme and actions?
What happened to the bonfire of quangos and Nick Clegg’s bill to get rid of regulations? These were simple things to do but they have not been done.
May 23, 2011
In order to have a better understanding of the trending costs of the public sector, would it not be useful to dissect human resource costs into salaries and pensions and with a further examination of employment in the public sector of people who are already drawing a public sector pension? A few graphs in this area might by informative.
An article in the FT, “Sir Ralph’s lessons on short-termism” with reference to a BoE research paper; a paragraph of the article says:-
“Rolls-Royce had strong leaders and great products. But it also had something else to protect it from short-termism. Thanks to the sensitive nature of the company’s nuclear interests, the government holds a golden share in the business, making it immune to hostile takeovers. Without that protection during the tough years, it is easy to imagine that Rolls-Royce could have become the fading subsidiary of an obscure US conglomerate. Shareholders might well have decided to take a small but certain gain from a hostile takeover today rather than wait for the uncertain returns tomorrow from all that new investment. That’s just what happened to Cadbury when it was taken out by Kraft last year.” Quite.
Is it not a fact that a private sector run exclusively according to the laws of the jungle, red in tooth and claw, will favour the most powerful predators, namely the international financial spivs? Is it not time to fret as much about our endangered species of indigenous, some world class, businesses than those in danger in the wild?
May 23, 2011
In the same newspaper, “UK tech strategy is ‘wrong’”, I also note that Mr Cameron is proposing to set up to a rival to Silicon Valley in East London: how much longer do we have to put up with this attention-seeking buffoonery? He also wants more easiiy to facilitate visas for foreign ‘entrepreneurs’. I have a suggestion for Mr Cameron, “stop making a good education for able children, the exclusive province of the well off. Stop importing foreigners to compensate for our deliberately degraded education system”.
May 23, 2011
@forthurst. If we were to have an economy that was vibrant and constantly spawning new successful enterprises then there would be no good reason not to sell the cash cows. After all they are ideal opportunities to sell against discounted cash flows.
The reason we lament the purchase of these cash cows by foreign multinationals is precisely because we have very few new successful enterprises to replace them. we have an economy that is far from vibrant that has been swamped by the state and until that changes we will continue the long decline.
Nothing wrong with selling cash cows but everything wrong with the UK economy
May 23, 2011
I do not see the major role of entrepreneurs to make good the depradations of city slickers especially as the taxpayer has to pick up the tab for the creation of the quite unnecessary loss of gainful employment through unemployment benefits, loss of income, social security, corporation tax and rates which results when a major successful business is asset stripped.
Germany makes it difficult, partly because so many successful businesses do not have public quotations, for takeovers; Germany is the powerhouse of Europe so I do not think there is argument for allowing the structure of the economy to be decided purely by financial operators whose sole interest is short term financial gain on the basis that their activities also somehow results in greater ‘efficiency’.
May 23, 2011
John – just make sure we are not sucked into any more Euro bailouts – seems to me that the essentials of the Tory Government are being overlooked – debt/deficit reduction,
law and order and immigration – simples. A some politicians want time to debate breast feeding in the HoL – what planet are these people on. Do we have to have riots for the politicians to connect?
May 23, 2011
I’m not surprised that there is no pre-election fiscal boost evident in the numbers. That would make the current “austerity” drive look somewhat hapless, as well as providing clear information for Labour to slag off the Coalition’s plans.
You say, John, that the percentages you quote are cash increases, so that is before inflation? I don’t have the number to hand, but CPI in 2010 averaged around 3.5%, with RPI around a percentage point higher. So depending on which indicator one prefers, the 5.3% cash increase in year 1 was 1.8% in real terms. Less actually, since the fiscal year runs from April, and CPI/RPI from April2010/April2011 were probably higher.
And doesn’t that underline the problem with cash numbers? I have no idea if the Treasury use the same inflation forecast as the BoE, but they surely can’t be very different. The BoE’s forecasts have been complete nonsense for most of the last 5 years, as pointed out quite eloquently by Jeff Randall in the Telegraph today:
http://www.telegraph.co.uk/finance/comment/jeffrandall/8529749/The-Bank-of-England-is-failing-this-country.html
Of course, if inflation stays stubbornly high at 5% (or, God help us, goes even higher), then the cash increases in the later years become quite significant spending cuts in real terms. I’ve pointed this out several times before on your blog, and it seems to me that this is one reason why Mr Osborne is so relaxed about us heading down the path to Zimbabwe. He is too young to remember how difficult inflation is to control once it becomes embedded in people’s expectations. It’s not something like QE that can easily be turned on and off at the flick of a switch.
Of course, it’s very nice that politicians can say, “Look folks, there are no cash cuts, we are actually INCREASING spending.” That’s great PR, but if in the meantime high inflation is being used surreptitiously to reduce the deficit in real but not cash terms, then it is nothing but a Treasury scam on the elderly and savers, and a gift to the young and the debtors (ahem, including those over-borrowed scoundrels, HMG!). Is this what the Coalition stands for, and wants to be remembered for? A generation of older, financially responsible voters will never forgive them if so.
Reply: The government has said it is going to cut the rate of public sector inflation with a 2 year pay freeze and better buying. This follows a period of faster inflation in the public sector than private.
May 23, 2011
JR: Is the spending more than expected because the coalition is polarized between those who tend towards higher taxes and more spending and others who seek to restore the country’s financial integrity? Everywhere you look you can notice taxpayers money being lavished on public projects which supports your finding on the spending increases.
As I strolled along the river at the weekend I noted the housing boom continues, that is for social housing. The proud new tenants were moving into their newly built riverside town houses. The PM questioned the wisdom of lifetime tenancies for social housing, while others question why the taxpayer is paying millions to buy luxury new homes when there are 700,000 empty homes available to rent. Has Grant Shapps lost his mojo?
May 23, 2011
This latest volcano has dumped more CO2 into the atmosphere that the UK produced over the last 20 years. Please does this mean the carbon emmissions religion will be cancelled?
May 23, 2011
Interested to know if you can back that claim up with any evidence? (Serious question, not just having a go).
May 24, 2011
I doubt it too much money being made by the vested interests.
May 23, 2011
A tangential point on inflation – if CPI exceeds RPI in the coming months will the Government then reverse its spin on the choice of CPI in its various calculations or will the penny drop and the two be amalgamated?
May 24, 2011
China downgrades UK
China’s first domestic rating
agency, Dagong Global Credit
Rating Co. Ltd., on Tuesday
downgraded the local and
foreign currency long-term
sovereign credit rating of the
United Kingdom by one level to
A+ from previous AA- with
“negative” outlook.
The Chinese rating agency said
the downgrade reflected the
UK’s deteriorating debt
repayment capability.
The GDP growth rate of UK in
2010 was 1.3 percent, lower than
average growth rate of the world
economy, with budget deficit
accounting for 9.8 percent of its
GDP. The sluggish growth
momentum continued in the first
quarter of 2011, Dagong said.
The rating agency said the British
government’s move to revive its
economy would not substantially
reverse the trend of increasing
the government’s fiscal deficit
and debt burden in the long
term.
Dagong predicted the growth
rate of UK economy to be
between 1.3 percent and 1.5
percent in the next two years.
And its budget deficit would
exceed the targeted 7.9 percent
to 9 percent.
May 24, 2011
With the FT saying that construction contracts have collapse by 39% it backsup all my fears that the UK GDP is highly geared to Government spending. Its not just basic spend it’s the PRivate public partnership AND the huge pension investments that will cause the biggest loss for business.
May 24, 2011
John
You have the best blog in the business. Surely you are in the wrong party? Please set up an alternative or point to a party that represents your views. You are damning of UKIP, but it seems to me, more because they can’t win at elections than that they might, actually, be right.
May 25, 2011
“where’s all the money going?”
“The UK has already spent more on bailing out countries in the eurozone than it has saved through austerity measures this year, according to Conservative MP Douglas Carwell.”
http://www.businessinsider.com/uk-bailout-participation-2011-5
May 25, 2011
£43.3 billion pounds is going on Interest payments to service the National Debt.
The Total Education Budget (Central and Local Combined) is £83.6 billion.
2011 UK Budget data from:
http://www.ukpublicspending.co.uk/budget_ukgs.php#ukgs302G0
We are spending 43.3 billion pounds on servicing our debt and yet we are also volunteering to service other Countries debt.
Does this make any sense? Not to me it doesn’t.
If we have to borrow our own money in order to fund public services, we therefore have to borrow more money to fund other Countries public spending which increasses our own National Debt and will therefore accelerate our own Interest Payment increases, further starving UK public services of funds.
Why doesn’t the Government just create the money itself without allowing private Banks to issue the Country’s currency – which then demands interest payments from Tax Payers?
http://www.positivemoney.org.uk/2011/05/let%e2%80%99s-print-money-and-buy-back-national-debts/
May 25, 2011
In addition to my prevous comment:
The Government has already issued 3% of the Country’s Money in the form of Coins and Notes. It would be a simple matter to increase what we already do while reducing – or maintaining a reduction in Bank Lending.
If Mr Cameron wants more money in the economy – why doesn’t he just instruct the treasury and Royal Mint to create it ? Why is he so insistent on Banks creating more debt – haven’t we got enough already?
A gradual increase in the fractional reserve percentage could be compensated for by additional moneys created – debt free – by the Government.
Fellow consevative MPs Dougals Carswell and Steve Baker have already acknowledged this – have you discussed this with them ?