A Tory case for delaying cuts

In the Times, Danny Finkelstein argues against a temporary fiscal loosening:

Summoning up the will and retaining the minimum of political support is incredibly difficult. And fragile...Once we return to a policy of borrow and spend, how will we ever summon up the will to stop again?

I'm not sure about this. If I were a Tory wanting smaller government - and this, rather than concern about the national debt, is the reasonable argument for cutting public spending - I'd have three concerns.

1. Delaying cuts gives us the chance to make more intelligent ones. It gives us the opportunity to consult workers on where best to make efficiency savings; these are better identified from the bottom-up than from the top down. Quick cuts are bad cuts, which risks discrediting the aim of shrinking the state. 

2. Cutting spending at a time when the private sector is weak isn't just a bad idea on Keynesian grounds. It's a bad idea politically. Support for cuts could be undermined by guilt by association with a weak economy.

3. History suggests that cuts now are a substitute for cuts in the future. My chart shows the point. It shows five-yearly growth in real total managed expenditure. Since the 70s there have been three periods of significant restraint: the five years to 1981, the late 80s and late 90s. All three were followed by periods of high spending. "Prudence", then, has not been a habit in the past. Quite the opposite.

This poses the danger that spending cuts now will be followed by a splurge later. Not only might this be a bad idea on Keynesian grounds - the splurge might add to strong growth and be potentially inflationary - but it would also unravel any progress towards a smaller state.

What I'm suggesting here is that it's not just Keynesians who should argue for postponing restraint. There's a case for intelligent Conservatives to do so as well. But this is the opposite of what's planned; on current policy, real TME sees its biggest fall this year, and a rise in the years after.

But then, do the Tories want to cut spending out of a genuine desire to see a sustainably smaller state? Or are they instead motivated by silly fears about the national debt and by a hatred of public sector workers and benefit claimants?

Comments

[Account Deleted]

Or are demands for a smaller state, like the demonisation of public debt, merely cover for privatisation?

[Jim]

Smaller state? You're having a laugh. There are no aggregate cuts, and you know it.

[chris]

@ Jim - look at the chart, or the OBR data underlying it. Real TME is planned to fall this year, and over the five years to 2017.

[Sam]

When the "bottom-up" efficiency savings are things like "we're paying fifty quid for a lightbulb because we're a bunch of muppets" you have to be right. When it's "We spend 20 hours a week filling out this paperwork which looks pretty pointless - can we stop?", you must be right.

What about when the efficiency savings are "I am one of five people employed to do x, but the job could really be done by three people," I am less convinced that you're going to get people to volunteer themselves of their colleagues for the chop.

One could simply pass a blanket 10% cut down the management chain, with the instruction to managers to identify the 10% of their immediate subordinates who can be fired with the least effect on the services that the manager's group must provide, but it seems unlikely that that would actually have the desired outcome.

[gastro george]

"There are no aggregate cuts, and you know it."

This is just a failure to discriminate between expenditure on services and expenditure on welfare. The former is being cut and the latter rising, for obvious reasons.

[Britmouse]

1) Five year growth of TME is a confusing way to present the data.

2) What have you deflated by? Most inflation measures include VAT, which is not great

3) Falling TME in 2012-13 fy is distorted by the Royal Mail pension fund asset transfer, which counts as negative net investment.

4) Current spending rises by about 2.7% in 2012-13, probably in-line with whatever inflation measure you choose; public sector gross investment looks roughly the same in nominal terms.

[Jim]

@gastro george: so the pound spent by an unemployed person on benefits does not affect aggregate demand at all, while the pound not spent by a redundant civil servant means demand falls I suppose?

[Keith]

The best reason not to cut spending is that spending is good. It is also popular. So in a Democracy that should have some consideration. No one really wants a lower standard of living and cuts mean a lower standard of living. But "conservatives" so called seem unable to understand that or new Labour. In the fifties supermac built hundreds of thousands of council houses a year as he seemed to grasp that improving human happiness and quality of life is what politics and the state should be about.

I am sick of the Randian right wing nut cases. Lets go back to the future and spend spend spend. Rather then allow deranged people and their lapdog propagandists to reduce our quality of life.

[George Carty]

Surely if we want to reduce the budget deficit without impoverishing the people, we need to do something about the trade deficit, and/or tax away all that cash that's apparently sitting idle in corporate bank accounts?

[gastro george]

@Jim: Because it's not a 1:1 relationship? And because you've removed productivity from the economy.

[Jim]

@gastro george: well indeed productivity might fall. But that's not the point is it? Aggregate demand is pounds spent, not who is spending them. A pound spent by a dole claimant is equivalent to a pound spent by a brickie who's building a new school. Its the same.

[gastro george]

Jim: That's uncontroversial. But you know very well that if, for example, 80% of service cuts were "lost" in increases in benefits, then this allows the right to simultaneously cry "there have been no cuts", "so we must cut some more", "look at benefits rising, let's cut them as well", etc.

It's a disingenuous argument - to enable the continuation of an ineffective policy that's only acting as a shield for other political motives.

[chris]

@ Brtimouse - the nos are deflated by the GDP deflator; I'm using OBR data. We can argue endlessly (and pointlessly) about what precisely is the best deflator.
The numbers post-2012 aren't important for this purpose. My only point is merely to show that periods of spending restraint tend to be reversed, rather than to persist.

[Jim]

gastro george: 80% of service cuts hasn't been replaced by benefits rises, 110% has. Overall spending is UP under the Coalition, not down. Ergo whatever money has been cut from departmental spending has been more than replaced by other spending (yes mostly on benefits I expect). So the only way that the current government policy can be said to be reducing aggregate demand (and therefore in some way stopping the economy from growing) is if a pound spent by a benefit claimant is less of a boost to aggregate demand than a pound spent by someone working for the State. Is that what you are arguing? That giving one civil servant £25K/year is a greater boost to the economy than giving £70/week to 7 dole claimants?

[Blissex]

«In the fifties supermac built hundreds of thousands of council houses a year as he seemed to grasp that improving human happiness and quality of life is what politics and the state should be about.»

As to this specific case, 60-70% of voters own houses and they would hate for more houses to be built in an effort to improve the quality of life of the loser bottom 30-40% at the expense of the tax-free capital gains that they consider their right, as they have had them for 20 years.

It continues to astonish me that in discussions about economic policy distributional impact and the consequences on voting patterns are not considered or underestimated.