With a little over three weeks to a contentious UK budget, it is timely to deliver some home truths to those -- on both sides of the political aisle -- with their eyes on public spending. To the left sit those who fail to see the economic risks generated by inefficient and bloated public spending. And to the right are those who believe that large public spending cuts -- without collateral damage -- are easy to identify and realise. Both views represent dangerous fallacies.
But first some empirical context. Since the end of the Second World War, the level of annual public spending has averaged 40 per cent of the size of the UK economy. Like all economic measures, public spending has waxed and waned with political whim, with public attitudes and with the prevailing economic wisdom.
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But the extremities tell an important story. Postwar public spending peaked at just under 47 per cent of the UK economy in 1975-76. This coincided with the country facing the humiliation of requiring a loan from the International Monetary Fund to stabilise its economy in the face of high inflation, and a balance of payments crisis. By way of contrast, public spending reached its nadir in 1988-89 at a little under 35 per cent of the UK economy. This coincided with the strongest five-year period of per capita economic growth in the UK's history -- a compound 21 per cent over five years. To put that number in context, the UK's per capita economic growth over the last five years has been precisely zero.
That data alone would suggest that current levels of public spending -- expected to average 44 per cent of the UK economy over the lifetime of this parliament -- put the UK economy closer to levels consistent with a financial meltdown than to realising the Labour government's stated goal of having the "highest sustained growth in the G7".
This is not to suggest simple causality between high public spending and a crisis -- but it is one of the metrics that investors look at when they lend £2.8 trillion to the UK government.
Before those advocating for shrinking the scale of UK public spending get too excited at this data let me pour on a large bucket of cold water. Whatever the economic growth merits of bringing public spending back on a sustainable footing, any suggestion that this is a simple or quick process would be misleading the electorate.
Times readers deserve the truth on what would be needed to bring public spending back to its long term average. Anecdotes about diversity, equity and inclusion (DEI) and overseas aid spending are rounding errors in a £1.3 trillion-a-year budget.
Unlocking big savings means identifying inefficient spending and then rooting it out in a way that doesn't erode the core public services we all both use and value. While the cost benchmarks for large infrastructure projects such as HS2 and Hinkley Point nuclear power station all point to poor contract management and overlayered regulatory approvals -- and these undeniably require attention -- what is required is much larger. In short, it requires a whole mindset change.
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Foremost it requires a culture shift by everyone from politicians and civil servants through to private citizens -- all treating public funds like they would their own. This latter point is key. There is nothing more frustrating than switching on the radio at the moment to hear the phrases "the government should spend ..." or "the government should provide for free ...". The abstraction of government spending from the direct liability of personal tax, or indirectly in the form of price inflation, helps reinforce the sense that government spending and private spending are somehow sourced differently.
This abstraction generates government reach into areas far beyond its core remit, and stretches scarce resources to breaking point. In isolation, bat tunnels, fish discos, a football regulator, 25 current public inquiries, incremental housebuilding regulations and cutting-edge health treatments all have their individual merits. But they speak to a state sector unfamiliar with making decisions -- with huge public spending implications -- in a way that they would approach decisions that have an impact on their own finances. The impact of Covid-19 restrictions was arguably the most totemic example of the disconnect between public policy decisions and the huge private cost.
Similar challenges emerge when it comes to bearing down on the public spending bill for welfare, the state pension and public sector pay. Any decision has implications for child and pensioner poverty, and the retention of good people to operate and deliver high quality public services. It falls on a Labour chancellor to attempt to re-establish the right balance. The reality is that such politically difficult decisions are proving impossible to stomach for Rachel Reeves's own party, packed with MPs who cut their teeth in opposition indulging in intellectually vacuous ideas including modern monetary theory -- where the central bank can simply create all the money a public sector would ever need to fund its spending pledges. Faced with high inflation and a receding role for the central bank money printer these same MPs are now clinging to their big spending ideas backed by ever more concentrated taxes on individuals and businesses with the greatest ability to leave the country, or raise prices. It is a path to economic ruin.
On the other side of UK politics, Reform UK are increasingly finding the same issues that Elon Musk and his US Department of Government Efficiency team found in the US. Turning social media soundbites into financial savings in UK local government is rather harder than they envisaged. This is not to say that Reform UK -- and increasingly the Conservatives -- are on the wrong side of the argument. The gilt market that lends to the UK government is already sending a clear signal that the UK's public spending path is unsustainable. It is trying to do far too much. A focus on shrinking the state to make room for higher defence spending now looks like a strategic imperative extending far beyond this parliament.
The spending increases to welfare and health that have been possible over the last 40 years have in large part been made possible through shrinking defence spending and increasing the national debt three-fold. That looks like a path that has at best closed, and may now need a retread.
The truth on public spending is uncomfortable. The public show little inclination of wanting to hear it. But hard decisions on what not to do are required now. Or much harder decisions will get taken later.