It’s austerity all right – but not of the kind we actually need
IT has long been a theme of this column that the government and its critics alike have exaggerated the extent of the government’s belt-tightening. The coalition is doing this to try and reassure the bond markets while seeking to minimise the hit to the public sector; the opposition because it wants to blame the recession on “the cuts.” But there are two kinds of austerity: governments can either hike taxes or cut spending. Britain is definitely getting plenty of the first kind – but it is getting far less and far too little of the second kind than is usually understood.
Millions of people are suffering but that is because they, rather than the state, are being forced to tighten their belts – they are being hit by higher Vat, national insurance, capital gains tax, transport taxes, pasty taxes and the like. On top of that, inflation is gobbling up pay rises and slowly but surely eroding the purchasing power of whatever is left in workers’ pockets once the state has grabbed its share.
Even a cursory analysis of the Treasury’s Budget projections reveals that state spending is still going up in cash terms. After adjusting for inflation, it is only falling slightly. The problem is that some areas of the public sector are suffering heavily – libraries, for example, or infrastructure projects – while the government is still spending more and more in other areas, and not only on debt interest and unemployment benefits. So why all the misleading rhetoric?
As an excellent report from Tullett Prebon points out, the UK has been trying to placate (or as it bluntly puts it “dupe”) the bond markets by combining maximum spin with minimum substance. The report’s author, Tim Morgan, goes as far as to describe what passes for the debate on public spending in the UK as a “Big Lie”, “phoney austerity”, a “bare-faced deception”, “mendacious” and much else besides. It is good to see an economist at a City firm actually telling it how it is, rather than buying the mainstream, wishy-washy consensus; in fact, I cannot recall ever reading a piece of research from the City that contained so many insults. Great fun – but also deadly serious.
Morgan’s statistics are illuminating. In 2009-10, a combination of automatic stabiliser costs and a pre-election spree sent spending rocketing by 4.6 per cent in real terms, equivalent to an extra £31bn. During the coalition government’s first year in office (2010-11), spending increased again, albeit by just £2.4bn. Public spending finally fell in 2011-12, but only by £10.3bn, or 1.5 per cent. Total spending in 2011-12 was £7.9bn (1.1 per cent) lower than in 2009-10 but £22.6bn (3.4 per cent) higher than in 2008-09. At best, the supposedly huge cuts in spending delivered by the coalition amount to only a little more than £1 in every £100. Any well-run household or company would be able to cope; why can’t the British state?
The figures make grim reading. The deficit has been reduced, from £161bn (at 2010-11 values) in 2009-10 to £123bn in 2011-12. But the inflation-adjusted deficit remains higher than it was in 2008-09 (£100bn), the year before the Labour government’s pre-election spending spree. Of the £38bn deficit reduction achieved since 2009-10, three-quarters has resulted from higher taxes and only one quarter (£8bn) from spending cuts. Again using constant (2010-11) values, taxes have increased by £30bn since 2009-10, absorbing three quarters of the entire increase in GDP of £40bn over that period. Astonishingly, therefore, the private sector has kept just one quarter of the already tiny increase in GDP of the past three years. It’s austerity all right – but of the wrong kind.