Stephen King: A week when you finish up clutching a pair of scissors
Economic outlook: In 2006 UK public spending was about 41 per cent of GDP. Last year it had jumped to 47.5 per cent
Monday 13 June 2011
It's been a "could've, should've, would've" kind of week. Courtesy of Ed Balls and some stray paperwork, we learnt that Gordon Brown "could've" got to grips with public spending back in 2006. Despite advice from officials imploring him to act, however, he chose not to do so.
Thanks to the Archbishop of Canterbury, we discovered that the people of this country "should've" been told during the last General Election about the current Government's "proposals for reform in health and education... radical, long-term policies for which no one voted".
And we now hear that, had the other Miliband won the Labour leadership, he "would've" admitted that "... we did not abolish the business cycle. We should never have claimed it. You can't in a market economy. And public spending plans cannot depend on it. Nor can you write your own fiscal rules and then be the judge and jury for how they are calculated and when they are met."
Putting all this together, you end up with a pair of scissors. Or at least you would do if you were looking at a chart showing the paths for public spending and tax revenue as shares of national income. In recent years, public spending has gone through the roof. Back in 2006, it was running at around 41 per cent of GDP. Last year, it had jumped to 47.5 per cent. Tax revenues, meanwhile, fell from 38.5 per cent of GDP back in 2006 to a measly 36.5 per cent last year.
Within this pair of scissors are two big problems. At the "macro" level, we are living beyond our means, a reflection of the sustained slump in economic activity. Regardless of who was responsible for all this – given his knighthood, it appears that Mervyn King is in the clear – the reality is that national income is around 11 per cent lower today than Brown and Balls thought back in 2006. That means much lower tax revenues and, hence, a bigger gap between receipts and expenditure.
At the "micro" level, the problem lies in working out how useful our public services are. Governments of all hues have had trouble with this one. How is output measured? By the cost of the services provided, with no account of productivity? By the meeting of targets, with no account of quality or, indeed, of whether the targets make any sense? The great advantage of a market economy – most of the time – is the transparent discipline imposed by Adam Smith's invisible hand. Without it, allocating resources efficiently becomes a major headache, something the Soviet Union learnt the hard way.
The Archbishop of Canterbury, meanwhile, says that "at the very least, there is an understandable anxiety about what democracy means... the anxiety and anger have to do with the feeling that not enough has been exposed to proper public argument".
Whether or not people are anxious and angry, his comments don't fully add up. No one, as far as I know, voted for a Conservative-Liberal Democrat coalition, yet we got one, the result of an entirely democratic process. Plenty of warnings were given about the implications for public spending under any plausible election outcome, and plenty of columnists warned that the axe would eventually fall under either the Tories or Labour (for what it's worth, my own version appeared in The Independent on 29 March 2010). Free speech is an essential part of any democracy.
And, while the Archbishop might be happy to support Tony Blair's "Education, education, education" mantra, the benefits of all the extra money poured into our education system appear to be few and far between.
The OECD's latest international ranking of educational attainment is hardly encouraging. On reading ability, the UK lags behind not only the US, Germany, Japan, France and Sweden (the usual suspects) but also China (at least the Chinese in Shanghai), South Korea, Estonia, Poland and Taiwan. The mathematics results are not much better. Kids are flourishing in the emerging world: British kids, sadly, appear only to be submerging.
So it is only right to question the amount spent on our public services, both from the point of view of what the nation can afford and from a value for money perspective. And here it is time to face up to reality. No matter what macroeconomic policies are on offer over the next few years, the level of economic activity in the UK is going to remain well below the forecasts made before the financial crisis. That leaves the nation with three broad choices: raise taxes to match the now higher share of public spending within GDP, cut public spending (at least as a share of GDP), or carry on borrowing.
The UK's recent history tells us something about the wishes of the electorate. Since the 1970s, there have been only two occasions during which public spending has been as elevated a share of GDP as it is today: the mid-1970s, when Britain had to be bailed out by the IMF, and the early 1980s, when a deep recession left public spending high relative to a depressed level of GDP. Neither occasion was a very happy one but, on both occasions, political leaders decided that the public spending bill was simply too big (some cynics still believe that Jim Callaghan and Dennis Healey invited the IMF to "help out" because the Labour Cabinet at the time simply refused to wake up to reality). Put another way, both mid-70s Labour (eventually) and the early-80s Tories recognised the limits to taxation.
And those limits equally apply today, a truth recognised by all major political parties. So even if tax revenues could be raised a bit, any Chancellor of the Exchequer today knows that there are really only two fundamental options: cut UK public spending or carry on borrowing in the hope that the economy might eventually stage a powerful recovery.
In the 1980s, Margaret Thatcher got lucky. The UK economy bottomed out in 1981 and, thereafter, staged a strong recovery. Tax revenues rose quickly. The budget deficit shrank and, eventually, turned into a modest (and temporary) surplus.
Few people today, however, believe in a repeat performance. Most forecasts point to only a painfully slow pick-up in economic activity, leading to the inevitable conclusion that either the Government reins in public spending or it carries on borrowing like there's no tomorrow.
With low interest rates, it's relatively cheap for the Government to borrow at the moment. So, in theory, we can protect public services for the current crop of voters. But, by doing so, will we simply increase the tax burden for the next generation of voters?
And, if we do that, will we finish up with a persistent economic stagnation? That, after all, has been Japan's experience over the last 20 years: bigger and bigger budget deficits accompanied by less and less economic growth. Democracy is great, but the democratic will of the current generation should not be used to abuse the interests of future generations.
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