The BBC this morning started to do the governmentâ€™s bidding again by presenting the tax and spend position in the usual Labour government way. As we have been taught, the governmentâ€™s spending totals are designed as a trap for the Conservatives. Indeed, that is probably their only purpose now, as they are works of fiction. If Conservatives say they will match the totals then we are told there is no scope for the tax cuts the public and the economy so clearly needs. If the front bench were to say it wanted to spend less than Labour, the government then chooses the most idiotic and inappropriate cuts in spending for the Opposition â€“ ones which they would never adopt – and the BBC dutifully peddles these to the electorate.
The government wants us to believe that all the spending they are incurring is absolutely necessary. Indeed, listening to them you would think that practically all the money goes on the NHS and the schools. We rarely hear these days of the biggest block of spending, the massive benefits bills which Labour used to call the price of â€œeconomic failureâ€ when it was in opposition. We are never told how much it costs to run the civil service and all the quangos, following a decade of huge increases in staff numbers to run even the lowliest government department. We will now be told that the current spending total is â€œeye wateringlyâ€ tight â€“ it is after all a mere 2% over and above the rather lively inflation rate the government has generated. What would a housebuilder, an estate agent, a surveyor or a property business give for a guaranteed 2% real growth this year?
None of this guff from the government is true, and I trust most of the public has now seen through it. The only thing we can agree about is that there have been some very large increases in spending in the period 2001-2006, and the rate of increase in medium term plans is now lower. However, it is quite likely this year there will be large overruns, so we are not in practise keeping to the 2% growth targets. Northern Rock was an additional item which has still only partly gone through the central government books (Supplementary estimate Â£5.3 billion). The compensation package for the Income Tax increase needs to be added in (Â£2.7 billion so far) and anything from the 42 days and other packages that was not in the original figures. On honest accounting there must be an additional Â£10 billion or so this year to add on. I expect the governemnt to go on spending and borrowing like there’s no tomorrow, whatever the plans say.
The public is now far more sensible than their government. They know that all too much of the extra spending in the spendthrift years did not go to buy more teachers, nurses and doctors. It went on management consultants, spin doctors, administrators, pensions, pay awards, reorganisations and new quangos. It also went on keeping a large number of people out of work on benefit, whilst inviting in a lot of people from elsewhere to carry out the jobs existing residents were reluctant to do or did not have the skill to do. The public does not think in terms of medium term spending plans and guaranteed rates of growth in spending. They want better public services and lower taxes, and now know that the waste and unnecessary expenditure is so large that is possible.
The UK economy performs best when public spending grows more slowly than the economy as a whole. This method also gives the best long term rate of public spending growth, as it achieves better overall levels of growth. In the 1970s Labour tested to destruction the idea that the government could improve things by boosting public spending well above the growth rate generally. A trip to the IMF for a bail out, followed by a winter of discontent when the many public sector workers turned on the Trade Union government left us very weakened.
The first year and a half of Margaret Thatcher saw the spending growth continue, mainly owing to large public sector pay awards. The inherited inflation persisted, the private sector was squeezed, and the Conservatives plunged to third in the opinion polls, with many in the governing party wanting to change Leader. In 1981 the Prime Minister set a new course for public spending, keeping its growth below that of the economy as a whole. She ushered in a decade of good expansion with low inflation. Only the establishmentâ€™s stupid wish to join the Exchange rate Mechanism brought this to an end, when all three political parties united to get it comprehensively wrong. The ERM destroyed the growth path by forcing boom and bust money management on the authorities. When the pound was strong they were forced to print pounds to try to get its value down.When that caused an inflation they were forced to throttle the economy and to destroy pounds to try to get its value back up! The establishment was deaf to the few of us who pointed this out before we had to live through it.
After the ERM Conservative Chancellors again ushered in an era of low inflation and good growth by controlling public spending growth. Gordon Brown wisely took over these Conservative spending plans, and had a successful first three years on the back of them (apart from the tax grab on pension funds and his partial destruction of the Bank of England). Between them Lamont, Clarke and Brown Mark One built a strong position, with debt repayments and lower spending growth. It meant it took Brown five years to undo it all once he unleashed the forces of indiscriminate spending.
At the same time as he wasted too much public money, he started to reap the bitter harvest from his reforms of the Bank of England. They decided to follow boom/bust monetary growth as if we were still in the ERM. So we enjoyed a period of false prosperity based on too much credit, and are now experiencing a very nasty credit crunch.
The economic history of the last 30 years shows us that the main requirement from government to create the conditions for prosperity is to set a target for public spending growth lower than the forecast for economic growth overall, and to keep to it. I donâ€™t mind how they sort out the politics of tax and spend to do so, but the need for such a change of policy is clear. Brown and Darling have said they are going to do that, but with falling growth and overspending, they are still a country mile away from achieving it.