Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 17 November 2015

Austerity, the Treasury and Spending under Labour

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.      

29 comments:

  1. One of the golden rules of outsourcing is that you shouldn't lose your in-house expertise - otherwise how are you going to manage the contractors. It seems that the Treasury has forgotten this - but that would be consistent with other UK government outsourcing.

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  2. Austerity whilst autoenrolement pension contributions kick in this month plus increased NI contributions next April sees disposable income reduced as well. Await statement on tax credits later this month to see how quickly the recession returns. Economic mismanagement seems too kind a description. MPC productivity at least with 8 meetings a year instead of 12 for same pay ?

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  3. Is it known how many Treasury officials, or civil servants in general, are graduates of PPE? Given that almost everyone who graduates from that circle seems to think austerity means something, it might go some way to explaining a group think mentality that sets in. Or else it might be explicable by the need for self-protection. Civil servants are often the first in line for job losses when efficiency savings start up, so it's entirely possible that they 'egg on' to demonstrate their devotion to the cause and save their jobs. This need to demonstrate loyalty for self-interested reasons is, after all, why servants to the leaders can often be even more extreme than the leaders themselves.

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  4. Hi Simon, it was Gordon Brown as Chancellor in 2006/7, not George!

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  5. Doesn't the phrase “sins of carelessness and hubris during the pre-crash years” actually refer to the argument that the Labour government, rather than the Treasury itself, was wasteful? (I know you object to the validity of that argument, but it does have merit in my view and, hence, could be to what the phrase refers.)

    Also, this is yet more evidence in favour of an independent fiscal policymaker (with goal dependence but instrument independence) being put in place (as I've been suggesting for years). This will enable appropriate weight to be given to the macro-economy as a whole (providing that it is one of the goals set by the government).

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    1. «sins of carelessness and hubris during the pre-crash years” actually refer to the argument that the Labour government, rather than the Treasury itself, was wasteful?»

      I think that this point is a classic example of falling victim to the "media-macro" of which our blogger is so fond. He keeps saying that "austerity good" is media-macro, but it is framing the discussion in terms of "austerity good or bad" that is, and he does that as he insists on the "austerity bad" position.

      As our blogger is fond of demonstrating, the fiscal policy of the 1997-2010 period was quite reasonable and far from profligate, just merely slightly expansionary, which in a period of seeming great prosperity seems a bit pro-cyclical but understandable.

      But the big deal of 1987-2010 is something that our blogger is fond of not-saying, and the current coalition is also fond of not-saying, which is it was a period of outrageously profligate New Labour credit and regulatory policies, in mad dash of that C Crouch called "private keynesianism".

      Both our blogger, the press, New Labour and Conservative figures are very keen to continue the mediamacro framing on "austerity good or bad" and pass largely under silence the extreme imprudence of which both flavours of government have been building up in credit and regulatory policy.

      Such imprudence was denounced by T Blair himself in 1987 well before he become one of its worst perpetrators:

      «Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods» «The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.»

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    2. «an independent fiscal policymaker (with goal dependence but instrument independence)»

      Leaving the distributional impact of fiscal policy to wise philosopher-kings, just as we already do for the distributional impact of monetary and credit policy.

      What a marvellous mediamacro concept! :-)

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  6. I’m puzzled by SW-L’s claim that when technocrats are in charge (e.g. we have an all powerful BoE MPC and OBR) 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.”

    Strikes me that if the all powerful technocrats understand economics, the economy is LESS LIKELY to lose out. Obviously I’m assuming that MPC and OBR technocrats understand macro better than politicians and bean counters at the Treasury. I’m fairly sure that’s a correct assumption, but not totally sure.

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  7. Why do we care if resources were wasted during 1997 to 2010. WTF does that have to do with now? If we waste resources in 2000 does it leave a magic curse?

    BTW look at this Simon:
    http://www.theguardian.com/business/2015/nov/16/japan-enters-recession-again-as-abenomics-falters

    "Economics minister Akira Amari said a lack of workers available for public works projects worth billions of pounds"

    Yup. That's what happens when you try and stimulate an economy with 'infrastructure' projects because you're obsessed with 'investment' and the current budget balance, rather than adopting a functional finance approach and adopting a Job Guarantee that just takes people as they are and gets them doing something useful - largely in the service sector.

    If you want high skill and capital intensive projects in the public sector, then you have to stop the private sector projects using the same high skill and capital. At which point you have improved nothing.

    So stop injecting at the high end, and inject at the poor end.

    Create Jobs for the People.

    http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

    Care to comment on the idea? You always get comments! It's not fair! I am green eyed with envy :b

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  8. BTW about the OBR they have shown how austerity killed growth:
    http://budgetresponsibility.org.uk/wordpress/docs/Effect-of-discretionary-policy-on-GDP-growth-final.pdf
    You may be interested Simon?
    Got it from:
    https://alittleecon.wordpress.com/2015/10/27/obr-shows-how-austerity-killed-growth/

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  9. It's GORDON Brown Simon, You're showing your age.

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    1. I know I'm old, but even I had to think who George Brown was. I think its just that I've written George Osborne too many times recently. Thanks to all for spotting this error.

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  10. "Delegating macroeconomic stabilisation means that finance ministries no longer need to have so much in house expertise on how the macroeconomy works.|

    Like you, I have built up a lot of respect for Philip Stephens, a critical thinker.

    I am not persuaded by the above quote though. An historian may have warned about the consequences of liberalisation of financial sectors and liberalisation of international capital movements. But I am not sure about a mainstream economists who do not have such an education. Do they have the critical thinking that goes with an education say in history, philosophy or political science which is largely about questioning? They would be against a single micro-founded model. They would not say that the economic problem is limited resources but unsatisfiable wants without a lot of questioning, in fact, I doubt they would say such a thing at all. Both the central bank and the treasury who advised the government clearly missed the fundamental developments taking place during the Great Moderation leading up to the financial crisis. Not only did they not know any economic history, they also forgot all about irrational behaviour in financial markets ('animal spirits') , a key part, perhaps the key part, of the explanation of why we get permanent disequilibrium in the labour markets as explained in the General Theory, which should still be the basic resource - not only of macro, but how you go about being an economist. Sticky prices and Taylor Rules is not the way you look at or manage a complex social system like a national economy.

    The financial crisis was global, but the UK was exposed to it. Do you really think this would not have happened if macro-economic stabilisation decisions were delegated to 'experts' in the central bank? Would you not agree that managing an economy requires a large cross section of expertise about how a complex social system like an economy operates and what is the best policy for such a system.

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    1. «Both the central bank and the treasury who advised the government clearly missed the fundamental developments taking place during the Great Moderation leading up to the financial crisis.»

      Do you have any evidence of this? To me it seems that exceedingly loose and risky credit policy was pursued very deliberately for political reasons, like it is being pursued now, and «the central bank and the treasury» are not staffed with the kind of grossly incompetent idiots that can miss that.

      The political opposition surely did not miss that either, and could have spoken against, but their political base was benefiting hugely from those «fundamental developments» and they went along with them. Even today the Conservative misdescribe the new Labour policy as one of fiscal looseness, which did not happen, instead of one of exceedingly loose credit and regulatory policy, which they are instead continuing.

      So should have «the central bank and the treasury» took upon themselves the role of "loyal opposition" to the sitting government and speak out about the risks involved in those «fundamental developments», when both the parliamentary majority and minority did not? Of course it was their political duty to not do so.

      If you have any evidence that the «the central bank and the treasury» did not speak out because they were incompetent, let us know.

      JM Galbraith wrote on this topic:

      «Governments were either bemused as the speculators or they deemed it unwise to be sane at a time when sanity exposed one to ridicule, condemnation for spoiling the game, or the threat of severe political retribution.»
      «Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. But there were also some who saw, however dimly, that a wild speculation was in progress and something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.»
      «Among those who senses what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated.»

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    2. «JM Galbraith wrote on this topic»

      Another of my favourite quotes is from a realistic contribution from an expert to the USA debate on derivative (gambling) regulation some time ago:

      «John V. Rainbolt Chairman, International Issues Subcommittee of the American Bar Association’s Committee on Futures and Derivatives Regulation: "Knowing the relevant history, a U.S. politician worth his or her salt should wonder if the Conservative government’s approach to market oversight has something to do with the number of Tory resumes on the street, and if a vote to duplicate U.K. market regulation communicates this disease, brought on by a rapid succession of Barings, Morgan Grenfell and Sumitomo problems, to name a few. British regulation, now recovering and making adjustments, failed not only to protect the public from the industry, but the industry from itself."»

      and this is from a UK commenter on another blog:

      «As long as the FCA is a creature of the Treasury and subject to the dictat of the Government of the day there will be no effective regulation of the Banks. I was in the Building Society sector for many years and was horrified at the compliance of my employers who, when the Government of the day said jump merely asked "How High". 100% loans, self-certification all encouraged by successive Governments to create a housing lead boost to the economy. There was no way that the FSA was ever going to reveal that the Emperor was not wearing any clothes and the same will apply to the new alphabet soup regulators. The minute it suits the Treasury to give the economy a "fix" of the easy money drug to which it had become addicted they will all roll over to have their tummies tickled - and of course line up their future banking sinecures and knighthoods.»

      And of course the "best and brightest" at the treasury and central bank often have «resumes on the street» and many want to «line up their future banking sinecures and knighthoods», and those who are not so astute probably think that speaking out about popular measures supported by both parliamentary majority and minority is not their role in a democracy.

      Accusing them of incompetence or stupidity without compelling evidence seems rather arbitrary to me.

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  11. Gordon rather than George Brown??

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  12. Thanks for that Simon.

    Two points: firstly I'm not entirely sure who George Brown is.... (sorry!)

    More importantly the last paragraph is spot on. Both the Prime Minister and Chancellor like to boast of making 'tough choices' which is an outright lie. They have consistently hit soft targets for spending cuts and tax changes. VAT up, cuts of social care by squeezing council budgets, investment decimated to name just a few off the top of my head - all whilst corporation tax is cut, top rate of income tax is cut and pensioners are protects (so long as they don't need social care that is).

    AFZ

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  13. George Brown? He was pushing up the daisies years ago. Surely you mean Gordon?! Good article all the same

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  14. "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."

    That would also be true of Inflation - a point you never discuss. Indeed, you seem to think Inflation is a cure, not a disease. How about explaining that to people who have to live on welfare benefits or pensions?

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  15. My experience with Departments of Economics and Finance (not the Treasury) is that they see themselves as hammers and every problem, or even issue, is a nail.

    Economy overheating? Cut spending. Economy flat-lining? Cut spending. Tax income increasing? Cut spending (risk of crowding-out). Tax take declining? ....

    I think that the mindset comes from the sixties when the belief arose that politicians, and also officials in other departments, would - given the chance - be totally irresponsible so at all costs they had to be discouraged from taking the 'easy' way out. Needless to say, this is now an excellent example of fighting the last (but one, two three) war rather than the current challenge.

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    1. «Economy overheating? Cut spending. Economy flat-lining? Cut spending. Tax income increasing? Cut spending (risk of crowding-out). Tax take declining? ....»

      That's ideological of course, and I reckon also in the end theological, in the proper sense, not a sarcastic one.

      JM Keynes famously wrote that on this that " Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist"; I think that dead economists and live ideologists are usually unwitting slaves to some long defunct theologian.

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  16. Perhaps George Brown could be the next chancer?
    Same old.

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  17. "I have on a few occasions seen senior civil servants defend austerity, but that is their job ..."

    Que ? Isn't that what political parties have press secretaries and think tanks for ? I thought that civil servants were supposed to provide civil service - ie fearless, honest, unbiased advice, not to act as thought controlled government agitpropists.

    No wonder governments all over the world make lousy decisions, they haven't got an honest civil service to keep them honest.

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  18. So the Treasury as usual knows the cost of everything and ignores its value.

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  19. Simon, I am a bit disappointed in your approach to debunking austerian claims of Labour profligacy, circa 1998-2008. Though you clearly make the necessary distinction between current and capital spending, you weaken the essential economic and historical argument by partially mischaracterizing budget categories.

    To my recollection, in accounting for GDP growth, human capital is at least as important as physical, and health and education investments are its key components. Yes, the conceptual boundaries of current vs. capital expenditures in these areas are somewhat soft and debatable, but what cannot be disputed, by any means, is that all of NHS and education spending (what also grew faster than current average) ought not be tabulated as a current expenditure.

    And in the context of your recently begun endeavor to better ensure that professional macroeconomic advice is more broadly and clearly heard, I would urge you to not allow these important distinctions to be blurred.

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    1. I am a little late on this but I hope it is still worthwhile to make a few points about the nature of the UK civil service and of the Treasury in particular. On the current v capital point, developed economies and increasingly others too abide by commonly agreed standards of measurement, categorisation and classification and therefore their Finance Ministries, including our own, do not have the scope to veer off into idiosyncratic new definitions - or rather, they do but that is quite unnecessary eg the case can still be made for prioritising certain types of current expenditure without reclassifying these as capital. On defending Government policy, critics above seem to be forgetting that this role is only part of the job and need not clash with the role of providing impartial policy advice based on evidence rather than ideology, prejudice etc. It can actually be helpful in practice to have the same advisers who engaged in deciding policy go on to get involved in implementing and justifying it because they will know its merits and its weaknesses so will not just bring an ideological perspective. Finally, terms like "bean counters" are plain silly and it's simply not the case that the Treasury is just narrowly driven by economic analysis: the head of the department, for example, Sir Nicholas Macpherson, is a history graduate and the UK's political and economic history is quite frequently assessed at internal events involving external invitees such as (to take contrasting examples) Nigel Lawson and the Observer's economics commentator William Keegan. I would personally argue that the Treasury is indeed too narrow and short term in its approach but that's not because of historical ignorance, or ideological servitude to the government of the day.

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  20. Its interesting that after the crash in 2008 the Australians did a big "timely temporary and targeted" stimulus, with a good deal of apparent success.

    Australia has not one but two civil service departments responsible for the budget - Treasury (full of economists) and Finance (full of accountants). Finance instinctively hated the idea of a stimulus, but Treasury won the government's ear.

    So there really is value in separating the people whose job is to keep the economy running from those whose job is to prevent spending departments from building expensive empires - both are needed but the guardians of the public purse ought not to be the guardians of the economy. Maybe HMT should be broken into two.

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  21. «cuts of the order of magnitude proposed, on top of previous cuts, can only harm public services that people want or need»

    That is a quite ridiculous argument: the voters returning a parliamentary majority convincingly voted for those cuts, they were not deceived at all. They knew whom and for what they were voting for.

    Under a democratic system it is the voters who return a parliamentary majority who decide for themselves what they «want or need».

    Perhaps wise philosopher-kings from Oxbridge know better than those voters, but democracy has two features: voters are entitled to suffer or gain from the consequences of their choices, and the majority wins and the minority loses. In the past 2 elections the parliamentary majority was returned by southern rentier voters and they won, and everybody else lost.

    «There are two ways that you can squeeze the public sector without much visible pain, besides greater efficiency. First you can cut investment, [ ... ] Second, you can cut spending on groups who do not have a public voice.»

    There is a third one that D Cameron seems to indicate with "Conservative best practice": you outsource civil service/local council jobs to private companies that then cut pension contributions from 25-30% to 5% of payroll, which is what has happened to private sector jobs and nobody complained.

    As to «groups who do not have a public voice» that includes most voters outside the South East, as they either vote Labour or their vote is otherwise irrelevant.

    The spending cuts of the recent past fall disproportionately on the North and people who work without having much property, that is the cuts have been targeted fairly carefully at everybody outside the voter base of the current parliamentary majority, and some notable spending boosts have been targeted at that voter base, also I guess because G Osborne knows that he has to win the internal Conservative party elections to become leader, and the vast majority of Conservative association members are southern rentiers (and usually retired women).

    Westminster council demonstrated how to win UK elections under first-past-the-post:

    «the eight wards chosen had been the most marginal in the City Council elections of 1986.»
    «In services as disparate as street cleaning, pavement repair and environmental improvements, marginal wards were given priority while safely Labour and safely Conservative parts of the city were neglected.»
    «In 1990, the Conservatives were re-elected by a landslide victory in Westminster, increasing their majority from 4 to 38. They won all but one of the wards targeted by Building Stable Communities policy. Porter stood down as Leader of the Council in 1991, and served as Lord Mayor of Westminster in 1991-2.»

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