Why public spending needs to fall as a proportion of our national income

Posted in Blog, Politics

UK politician John Redwood has helpfully drawn our attention to Table 1.1 of the Treasury’s own Autumn Statement book. The table makes clear that in 2011 private consumption fell sharply. Business and dwellings investment also fell. The public sector, taking both current and capital spending together, showed a real increase. He suggests that commentators should read Table 1 and realise they are quite wrong to keep on talking about the deep public spending cuts so far. Overall there have been none, so the “cuts” cannot be the reason for poor economic growth.

Redwood observes: “The growing share of the public sector is astonishing. It has been shielded from all overall real cuts so far since the recession hit in 2008. The Treasury figures show that the public sector spent 41% of our total national output in each of the years 2005-6, 2006-7 and 2007-8 before the recession hit. It shot up during the recession and is now running at 47%. Because the public sector so expanded its share of a falling total, the squeeze on the private sector was intensified. The private sector not only had to absorb the hit from recession, taking away revenues from its businesses and employees, but also had to absorb the hit of a large increase in tax revenues to help pay for the expanding public sector. This year taxes will be £46 billion higher than in 2008-9, despite national income being lower than at the pre recession peak.

“Some of this change was of course the so called automatic stabilisers. Public spending does go up in a recession as more people lose their jobs in the private sector and rightly qualify for benefits from the public sector. Some was a planned fiscal or Keynsian boost to demand, which did not succeed in preventing a sharp reduction in private sector demand. It did help intensify the tax squeeze and inflation squeeze on the private sector.

“So let us assume that the high levels of public spending achieved under Mr Blair and Brown before the recession struck are the desirable norm, the levels the UK public wishes to vote for. That means getting UK public spending back to 41% of our national output, from the current 46% planned for this year. In order to do this without making any real cuts to public spending the UK private sector needs to grow more quickly.

“If the UK economy grows at 2.5%, its old pre crisis growth rate, the UK could reach Labour’s preferred level of public spending by 2016-17 by freezing current real levels of public spending and allowing the private sector to grow. If the rate of growth of the UK economy is now around 1%, as some fear, by 2016-17 UK public spending would still be a very high 45% of national output without real cuts.”

Surely all agree we need more growth. John Redwood argues that “the way to achieve it should not be in doubt either. It is back to our old favourites. Cut tax rates on earning and making profits, reward savers better, fix the banks, and get many more of the costly but less desirable regulations out of the way. Public spending has risen, continued to rise under the Coalition, and needs to fall as a proportion of our national income. It is easier to do that if the economy is growing.”