The debate on the publication today of the statistics on the public sector finances for 2012/13 has focused mainly on whether the deficit is falling or not. The answer is no: the deficit in 2012/13 was broadly the same as in 2011/12. But is that because there is too much austerity in Britain or not enough?
Many on the right of British politics argue that spending is rising, not falling, and therefore that austerity cannot be responsible for the stagnation in the economy. So what is the true picture?
First, net capital investment has been cut consistently since the general election in 2010. Today’s figures show that it was cut in 2012/13 by a further 23.1 per cent. It has now fallen from £38 billion in 2010/11 to £23 billion last year. Public investment is proportionately where the steepest cuts have come – on social housing, school building and so on – and these have fed directly through into weaker construction sector output.
In contrast, spending on benefits is up, by a little over £10 billion to £192 billion in 2012/13. This largely reflects the uprating of the Basic State Pension and other benefits, like Disability Living Allowance, by 5.2 per cent last year (the CPI reference figure for the 2012/13 benefits uprating). Working households have been squeezed, however, with the main elements of the Working Tax Credit and other benefits, like Child Benefit, frozen again last year.
Other current public spending is broadly flat – indeed up a little in 2012/13 to £391 billion. But here too, the headline figure obscures big cuts in local government, policing and other key public services. Overall, public sector employment fell by 293,000 or 4.9 per cent (excluding FE college staff, who were reclassified to the private sector) between December 2010 and December 2012. This is a clear indication that expenditure has been cut.
Spending is only half the story, however. As the table below shows, fiscal consolidation in the early part of this parliament also came from tax rises, such as the increase in VAT. In 2011/12, the ratio between tax rises and spending cuts in the cumulative consolidation was 44:56; last year it was 38:72, and by 2015/16 it will be 20:80. In the next parliament, spending cuts will take almost all the burden.
(Click on table to enlarge)
So austerity is happening, through a mixture of spending cuts in key areas and tax rises, with spending reductions taking more of the strain in the coming years. Despite this picture, few people argue that the government’s fiscal policies are entirely to blame for the lack of growth in the economy. The impact of austerity on our key European export markets, the over-indebtedness of households and the lack of business confidence and bank lending for investment have all played a part. But the argument against austerity policies is precisely that in a balance sheet recession, when firms and consumers aren’t spending, the job of government is to maintain demand in the economy – particularly when interest rates are at the lower bound and it is relatively cheap to borrow to invest. Fiscal consolidation should start in earnest only when the economy has returned to sustainable growth, and not before, since otherwise the deficit will not fall – as today’s figures show. The fiscally conservative approach is to take a flexible and pragmatic approach to deficit reduction: stimulating when you need to, cutting and consolidating when you must.
Is there another way out of this, through a neo-Hayekian slashing of taxes and spending? As Jonathan Portes points out, this would be just as catastrophic as continental austerity policies, albeit that it would have the merit of consistency that the chancellor’s approach lacks. But would it stop the rise in government debt, as its proponents like Fraser Nelson and Douglas Carswell appear to claim? The only model of such an approach in the UK that I can find is in the report of the 2020 Tax Commission from the libertarian Tax Payers’ Alliance. Its proposals for big tax and spending cuts were modelled (albeit implausibly, in my view) by the Centre for Economics and Business Research and the results were as a follows: a bigger deficit in year one (2013) of nearly £50 billion, followed after five years by a deficit that would still be £23 billion a year higher, and then after 10 years, still £6.9 billion a year more. The government debt-to-GDP ratio would be vastly increased. Only after a decade would things improve. In sum: mass unemployment, worsening public services, a higher deficit and increased government debt – all for the promise of a smaller state.
This article first appeared at the IPPR blog, cross-posted with thanks
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