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Why John Redwood is wrong about public spending

I have a lot of respect for John Redwood’s intellect, if not for the political uses to which he puts it. So I am somewhat bemused as to how he could get it so wrong on public spending.

In recent blog posts, Redwood has argued that public spending is going up, not down; that the forthcoming cuts are very manageable; and that tax rises are taking too much of the strain for deficit reduction.

On spending, Redwood cites the June Budget cash numbers for public sector current expenditure (PSCE). In 2010/11, PCSE is £637.3 billion, rising to £711.4 billion in 2015/16. Ergo, public spending is going up.

In real terms however, allowing for inflation (or more precisely, the GDP deflator), the figure for 2015/16 is actually £630.6 billion – a real terms cut of nearly £7 billion.

But that’s not the whole story. PSCE is divided into Annually Managed Expenditure and Departmental Expenditure Limits. The former covers things like social security benefits and debt interest payments; the latter is current spending on services like the NHS, schools and so on. In 2010/11, this spending on departmental services is £342.7 billion. By 2015/16, that figure is set to be £340 billion in cash terms and £301.4 billion in real terms – a real cut of over £40 billion. It is only because Redwood does not cite this breakdown of current public spending that he can make it look as if there isn’t much pain to be spread around in service cuts. (Including capital spending doesn’t help either, since that is to be even more dramatically cut in percentage terms).

So, what about tax?

Redwood is right that in 2011/12 and 2012/13, tax bears a proportionately higher burden of deficit reduction than in later years – 43% and 36% respectively of the consolidation is made up by tax rises in these years. But that is because it is easier to bring in revenue from taxes quickly, compared to spending cuts, which take time to plan and put into effect. By 2015/16, fully 77% of the deficit reduction path comes from spending cuts, compared to 23% from tax.

Not that this figure differs wildly from Alastair Darling’s ratio of 71:29 spending cuts to tax rises by 2014/15, but the scale of the Coalition’s deficit reduction strategy means that £40 billion of cuts and tax rises is added to the £73 billion the former Labour Chancellor had planned.

What is missing from either John Redwood’s arguments or those of the Labour opposition is the recognition that cutting public capital investment is bad for growth and jobs. As the Office of Budget Responsibility shows (Table C8, p95 of their June Budget report), for every 1% of GDP saved in revenue by cuts in capital spending, 1% of GDP is lost: it is like for like. In contrast, the change in the VAT rate reduces GDP by 0.35% for every 1% of GDP raised in revenue.

Cutting capital is very bad value for money. Both parties need to think again.

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One Response to Why John Redwood is wrong about public spending

  1. James says:

    “Alastair Darling’s ratio of 71:39″

    Typo?