Brown’s second spending spree

Public spending is currently accelerating at an unprecedented pace — more swiftly, even, that during the total loss of control during the 1970s.  Spending is due to rise £120bn, 20%, in just three years from 2007/8 to 2010/11, taking it from 41% of GDP to above 50% — a much more rapid rise than in other parts of the world, lifting us from well below the EU average to well above.   The considerable majority of this rise is not the automatic result of the recession (extra unemployment benefits, etc.) – only 38% takes this form.  Neither is it any kind of “public works” programme – only 6% is extra capital spending.  Instead, the vast majority is extra consumption spending.  Many economists might support increasing spending during a recession.  Few would support increasing spending for this.

This extraordinary rise is a problem in itself — quite apart from any issues of increasing government debt or increasing the budget deficit.  Spending at such a high level reduces the growth of the economy.  Authoritative estimates produced by European Central Bank researchers suggest that each additional percentage point of GDP in public spending reduces the growth rate of the economy by 0.12-0.13%.  So, raising spending by 10% of GDP would be expected to reduce the growth rate of the economy by 1.2-1.3% - halving it from its previous level of around 2.6% per year down to more like 1.3%.  At this much slower growth rate, tax revenues would grow much more slowly and the government would struggle to repay the debts it is currently accumulating.

Labour’s 2009 Budget plans already include space for an additional £50bn-£70bn of fiscal tightening.  Since 80% of the tightening they have scheduled after 2011 takes the form of spending cuts, we can therefore expected Labour, if re-elected, to cut spending by some £40bn-£60bn, perhaps more.  If other parties are serious about controlling spending more tightly than Labour, they should therefore be anticipating spending reductions, relative to the 2009 Budget plans, greater than this.

If spending were immediately frozen at its 2008/9 level, apart from spending in areas such as benefits that rise automatically in a recession, by 2010/11 savings would already be above £50bn.  If you don’t increase the spending now, you won’t have to cut it later.  Do opposition parties really want to accept, unchallenged, plans in which there are huge spending rises in the run-up to the next General Election with rapid cuts scheduled for just before the following General Election?  Was spending on health, education, etc. really felt to be so low in 2007/8 that we needed to increase it by nearly 20% in just three years?  Does anybody believe there can be any serious return on such a wild spending spree?  And why has there been so much discussion about the merits or otherwise of a £12bn tax cut and almost no debate at all about a £120bn spending rise?

Andrew Lilico is the chief economist at Policy Exchange.  Their report on public spending can be downloaded here.