Some truly daft things are sometimes written about the UK’s fiscal position. One such offering is yesterday’s strategy note on austerity from Tullet Prebon, the bond vigilantes. It claims, in lurid prose, that Britain’s austerity is a myth – mendacious spin, no less. The ‘British state has defended its own spending, has mopped up most of any increase in GDP through higher taxes, and has kept on adding to its own debt,’ it argues.
First, let us imagine a world in which the biggest drop in output since the 1930s, which has involved the UK experiencing a double dip recession, did not lead to an increase in the government’s debt stock. The government would have had to cut spending and/or raised taxes by over £500 billion between 2008/09 and 2011/12, equivalent to more than the entire NHS budget every year (and a lot more in the depth of the economic crisis in 2009/10, when our deficit was at its peak). That is simply inconceivable without slashing entitlements to unemployment benefits, tax credits and all the other so-called automatic stabilisers – even then, that wouldn’t be enough. Spending on mainstream public services like schools and hospitals would also have had to be cut drastically. Demand would be sucked out the economy, causing mass unemployment, and the loss of productive output and associated tax receipts would cause the deficit to rise, not fall. This is exactly what has happened to Greece.
Even if we cast forward a few years, a far steeper deficit reduction programme than the government plans would be needed to prevent overall debt rising. It is simply absurd to profess horror at this fact, or to say that it is being somehow covered up. Unless the government runs a surplus, it will accrue debt, not pay it down.
But is it true to say – as John Redwood, Fraser Nelson and others do – that the UK isn’t actually cutting spending anyway, that austerity isn’t really happening? The proper basis for evaluating this claim is to compare 2011/12 spending with the outturn for 2010/11, the first year for which the Coalition government made fiscal decisions. Before then, in 2008/09 and 2009/10, the Labour government had effected a modest stimulus programme of 2 per cent of GDP. Spending increased slightly in 2010/11, despite the Coalition’s in-year cuts in the June 2010 budget. Its deficit reduction plan only started in earnest in 2011/12.
In that year, according to the OBR, central government current spending rose by 2 per cent, from £604.8 billion to £617.0 billion. But this was entirely accounted for by debt interest and net social benefits. Current spending on public services fell by 0.5 per cent – the first fall on a financial year basis since 1955/56. Tullet Prebon make no distinction in their figures between these forms of spending (annually managed expenditure and departmental expenditure limits in Treasury parlance). If you think these current public spending cuts have had no effect, you’ll need to explain why public sector employment has fallen by 410,000 over the last two years and is at its lowest level since June 2003.
As importantly, these figures exclude capital spending on things like housing and public infrastructure. Public net investment (ie after asset sales) fell by 24.9 per cent between 2010/11 and 2011/12 (a cut of £9.5 billion). It is on capital spending that the axe has fallen hardest in the last year – which is why construction output has fallen, taking us back into recession in the first quarter of this year. Capital spending has the highest multiplier effect on output, which is why cutting it has a big impact during periods of recession or weak growth. That cut, by the way, was a decision of the last Labour government which the Coalition inherited – so to register this out is not to make partisan points about the current government’s fiscal stance.
What about the claim that taxes, not spending cuts, are taking all the strain in reducing the deficit? It is certainly true that tax revenues flow into government receipts more rapidly than savings can be found from spending cuts. That is why much of the pain on current spending is still to come. Central government tax receipts did go up between 2010/11 and 2011/12, by 3.9 per cent or £20.1 billion. The bulk of that came from the VAT rise to 20 per cent (£12.7 billion) and compulsory social contributions (up £4.1 billion). Corporation tax receipts were flat at £42.1 billion in each year.
Of course, in the medium term, the UK government needs a credible plan to reduce the deficit – through a mixture of growth, spending cuts and tax rises. Fiscal resilience demands it. But to pretend that the UK government hasn’t cut spending and that the recession has nothing whatever to do with fiscal policy is simply wrong.
Here’s the table (click to expand) from the Office for Budget Responsibility which sets all this out. It is worth referring to when you next read rubbish like that from Tullet Prebon.