Philip Stephens of the Financial Times lashes into George Osborne’s plans for more fiscal austerity over the next five years. He argues that cuts of the order of magnitude proposed, on top of previous cuts, can only harm public services that people want or need. He writes “The really intelligent thing to do, though, would be to defer or, better still, abandon his silly fiscal target.” Bravo to that.
He also says something else which I found interesting. He writes Osborne has “been egged on by a Treasury obsessed with expiating its sins of carelessness and hubris during the pre-crash years.” As I think I have said before, one of the interesting and as far as I know untold tales about UK austerity is the extent to which it is encouraged or discouraged by senior management in the Treasury. I raise this in ignorance of which it is: I have on a few occasions seen senior civil servants defend austerity, but that is their job, and I’m not a good enough mind reader to know whether their heart was in it.
I have, however, made a general point about finance ministries and independent central banks. Delegating macroeconomic stabilisation means that finance ministries no longer need to have so much in house expertise on how the macroeconomy works. Furthermore in the UK the establishment of the OBR, which took over responsibility from the Treasury for macro and aggregate fiscal forecasting, reduced the need for that expertise still further. This means that in any contest between controlling spending (which finance ministries always have to do) and looking after the broader economy, it has become more likely that the economy will lose out.
Which inclines me to the view that Treasury management had a more encouraging than discouraging role, but it would be interesting to know if this is right. I was also struck by the phrase “sins of carelessness and hubris during the pre-crash years.” At first sight this suggests that the Treasury allowed Labour to embark on a large increase in public spending as a share of output, much of which was waste that could be reduced by greater efficiency. This relates to another point you often hear, which is that 2010-2015 austerity was largely painless.
Let’s fact check the numbers. When Gordon Brown took over the Treasury, total spending was around 37% of GDP. By following existing plans this fell to about 36%, but by financial year 2007/8 it was 40% of GDP. That is where we should stop if we want to exclude the impact of the recession. An increase worth 3% of GDP certainly sounds significant. However public net investment in 1997 was unsustainably low at 0.5%. If we just look at current spending it shows an increase of only 2% of GDP between 1997 and 2007.
Was that increase waste and inefficiency? If we look at the share of NHS spending over that period, it rose by around 2.5%. In other words, the increased share of government spending was largely accounted for by higher NHS spending. That was not Treasury carelessness and hubris, but a deliberate policy decision.
One final point. There are two ways that you can squeeze the public sector without much visible pain, besides greater efficiency. First you can cut investment, which no one notices until much later (unless you are unlucky enough to have a lot of rain). Second, you can cut spending on groups who do not have a public voice. Those who find they are excluded or reassessed for benefits, or the elderly who have had their support from their local authority cut, would not call past austerity painless. It seems that painlessness, like beauty, is in the eye of the beholder.