Stephen King: Public services: There's more to it than the size of the cheque

I don't think either party has any idea if public spending provides value for money
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The Independent Online

As an economist, it's really quite difficult to get excited about the election campaign. Perhaps my antennae are simply not well-enough attuned to spot the economic nuances that distinguish Labour from the Conservatives (even if the LibDems are happy to parade their tax increases to all and sundry). It seems to me that the economic debate has focused on trivial detail rather than the big picture. Perhaps this reflects a downgrade in the importance of economic ideas. This election, so it seems, will focus on trust, integrity and, if the Conservatives have their way, immigration.

As an economist, it's really quite difficult to get excited about the election campaign. Perhaps my antennae are simply not well-enough attuned to spot the economic nuances that distinguish Labour from the Conservatives (even if the LibDems are happy to parade their tax increases to all and sundry). It seems to me that the economic debate has focused on trivial detail rather than the big picture. Perhaps this reflects a downgrade in the importance of economic ideas. This election, so it seems, will focus on trust, integrity and, if the Conservatives have their way, immigration.

One reason for this economic boredom is Labour's decision to remove one of the most contentious areas of economic management from the grip of politicians altogether, through making the Bank of England independent back in 1997. Labour's campaign to criticise the Tories on the economy is understandable enough - a quick look at the opinion polls shows that the Conservatives have been floundering ever since the UK's ignominious exit from the Exchange Rate Mechanism in 1992 - but could the Tories really cock it up again? Surely the great advantage of having an independent central bank is that monetary policy is de-politicised?

Of course, the choice of inflation target remains in the Government's hands (unlike the European Central Bank's role as both judge and jury on eurozone inflation) so I suppose a madman could be elected demanding that the Bank of England should pursue an inflation target of 10 per cent per year rather than the current 2 per cent. This, though, is scarcely credible. In reality, the key reform is that monetary decisions no longer carry the risk of political manipulation: the Bank of England can raise and lower interest rates dispassionately, hopefully immune to the electoral cycle and forever intent on meeting its objective of price stability over the medium term, whichever government is in power and no matter what the opinion polls are saying.

Potentially a more promising area for debate is the provision of public services and its associated funding. At the moment, though, the quality of that debate has been decidedly poor. It's almost as if the electorate has discovered that it has, by accident, found itself voting for the best speakers at an accountancy convention. No wonder there are worries about the likely turnout on polling day. If the best our politicians can do is discuss who is increasing public spending by more (Labour's claim that the Tories were cutting spending appears quietly to have been dropped, hardly surprising given that the Tories' plans explicitly paint a picture of spending increases) and have a soporific debate about whether those increases can be funded without recourse to draconian tax increases (which bit of spin do you want to believe?), then it'll be no great surprise if people choose to go down to the pub rather than to the polling booth on 5 May.

Spending consensus

The truth is that neither Labour nor the Conservatives are choosing to offer anything that is radically different from what we've been used to over the last few years. The chart shows public spending as a share of UK GDP since 1970, using figures from the Organisation for Economic Co-operation and Development. The vertical lines indicate changes of Government over the whole period - from Labour to Tories, from Tories to Labour, then back again in 1979 before the arrival of the current Government in 1997. In the 1970s, the general pattern was one of public spending rising as a share of GDP. In the late 1970s, however - and before the arrival of Mrs Thatcher - spending was beginning to fall as a share of GDP, a process helped along by a combination of Denis Healey and the friendly officials at the IMF.

Mrs Thatcher's arrival initially led to a large increase in public spending - she needed the support of the armed forces and the police for some of the battles to come - but, throughout the 1980s, spending fell as a share of GDP. It rose again at the beginning of the 1990s - more a result of the recession rather than because of a sudden ideological shift - but the trend towards decline was re-established in the mid-1990s. Labour maintained that theme in the first two years of power, but then switched direction in 1999: the rate of increase of public spending as a share of GDP has been extraordinary over the last six years.

In my view, this is an area that justifies quite considerable debate - whether you support Labour or the Conservatives or, for that matter, anybody else. According to Labour, spending from now on will increase in line with the rate of expansion in the economy, so the line in the chart should level off. The Tories want to increase spending at a slower pace than that: for them, the line on the chart would start to drift lower. But both parties seem to have accepted that public spending, as a share of GDP, should be higher than it was when the Tories left office in 1997 and certainly higher than it was when Gordon Brown finished off the previous Government's spending plans in 1998 and 1999.

This might, of course, simply reflect both parties' recognition that tax cuts no longer buy votes. What matters today is commitment to public services and exactly how strong that commitment should be. The puzzling thing, though, is that I don't think either party has any real idea of whether public spending is providing value for money. Labour are bound to say that it does, and the Tories are bound to be sceptical, but ultimately this should be, at least in part, an empirical question.

To be fair, the Office for National Statistics has made efforts to answer this question. In July 2003, an article in Economic Trends ("Understanding government output and productivity") provided an experimental measure of public sector productivity. The broad conclusion was that government productivity had declined in recent years, notably from the point at which Labour began spending freely in 1999. Over the three years to 2002, the article tentatively suggested that government productivity had declined by a total of about 5 per cent. In follow-up work in December 2004 ("Public Service Productivity: Health", again in Economic Trends), similar conclusions were reached: on a variety of different measures, the evidence suggested that, at best, productivity in the health service had been static and, at worst, had probably declined.

The statisticians who penned these articles were, rightly, keen to emphasise the highly tentative nature of their conclusions. There are real problems with analysing productivity at the best of times, and those problems are even greater when there is no "price" or "value" that can be ascribed to goods and services. One obvious difficulty is that spending on things like health and education may bring benefits only over the long term. Then there's the issue of how to measure the success of any expenditure. If crime comes down, that looks like a desirable outcome, but it's not at all clear whether, directly, there's any additional effect on output and, hence, productivity. Then there are issues about the quality of outputs - customer service, for example.

In truth, there is no easy answer. But rather than focusing on how much money should be spent on public services, I wish that politicians from both parties would, instead, focus on ways of making clearer the benefits or otherwise that stem from the provision of public services. As voters, we're not easily able to judge these things, other than from our - often highly selective - personal experiences. And, as a result, we are not easily able to judge who's in the right. Knowing the size of the cheque that's been written to support the public sector is one thing. Knowing whether that money was worth spending is something entirely different.

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