Those public spending numbers

There seems to be some confusion about the government’s outlook for public spending - not helped by Liam Byrne’s appalling show on the Today programme.
My table tries to clarify. The first two rows come from table C4 of Darling’s Budget (pdf). Debt interest spending comes from table C9 for the years up to 2011. I’ve projected payments forward on the assumption that they rise in line with public sector debt. I’ve calculated spending in real terms (2008-09 prices) by deflating the spending numbers by the CPI forecast in table C1.

The numbers show that Fraser Nelson and the Tories are right. Total spending, after debt interest, will fall in real terms after 2011.
However, this is largely due to the halving of net investment. Except for a pause in 2012, real current spending is projected to rise.
The falls are larger if health spending continues to rise. In the table, I’ve assumed this rises 4% a year in nominal terms after 2011. This would imply a 3% cut in other spending between 2011 and 2014; I‘m not sure how Fraser Nelson gets his 10%, though I suppose you could approach it by factoring in some huge rises in welfare payments or bigger increases in debt interest.
If I were a government minister, I’d say the following:

We are pulling investment spending forward because we’re Keynesians, wanting to boost the economy whilst its weak. But counter-cyclical fiscal policy naturally requires that this spending falls as the economy recovers. Common sense also requires this. Having built a lot of schools and hospitals in 2008-10, we’ll not need to build them in 2011-14; building quality is bad, but not that bad.
What’s more, the fact that real non-investment spending, even after debt interest, is edging up shows that we’re protecting front-line services. Not expanding them, granted, but not cutting them either.

If I were a critic, I’d say:

These spending projections are too optimistic. Even these imply that public sector net borrowing will be 5.5% of GDP by 2013-14 (table C2). That’s way too high for an economy four or five years into recovery. So spending will have to be cut. This means real-terms cuts even in current spending.
Maybe big cuts. This table deflates nominal spending by the CPI. But history shows us that government costs rise faster than CPI - partly because of inefficiencies and partly because of Baumol‘s cost disease. If we apply a higher, more realistic deflator, to spending, we‘d see bigger real cuts.
There’s worse. As National Statistics told us this week, productivity growth in government is nugatory. So unless we reform the way services are delivered, real cuts mean cuts in the quality of service people get.

Now, I think there’s some merit in both claims here. So, is there any chance of the debate being along these lines, rather than people trying to merely obfuscate or exaggerate the data?  

Comments

[William]

If you were a government minister and you used the words counter-cyclical, you'd be a liar. Does any government do counter-cyclical spending? Or do they just spend it all when times are good, and borrow in a slump?

[zorro]

You mean might Gordon Brown tell the truth about a financial issue? Nope obviously not. He will blather on about Labour 'investment' vs Tory cuts. The people will not believe him because they do not believe a freaking word which comes out of his mouth (or any Labour politician). Bye Bye Gordon. Whether it's now, in the autumn or what's the last possible day you could hold an election?

[Mike Woodhouse]

"any chance" ?

I doubt it, unless El Gordo's "reforms" include a new form of politics where confrontational point-scoring and biased "fact" selection are reduced in value and identifying and solving real underlying problems is given some genuine importance.

And what are the chances of that happening?

[Charliemcmenamin]

& the alleged £15bn gap in health spending generated simply by us all getting older? Where does that fit into your numbers?

[Roger]

The £15bn gap in health spending - which is a projection by the NHS Confderation rather than an official estimate - definitely does include a hefty cost element from population ageing.

Similarly one should also take into account the impact of raising the school leaving age 'by 2013' on education costs.

Actually I think the current govt line that you can't meaningfully predict spending beyond 2010/11 is logically if not politically right.

All that you can reasonably do is offer a long series of possible scenarios - and nobody in politics dares admit radical uncertainty.

[Charliemcmenamin]

Thank you Roger

Can I just confirm - for the avoidance of doubt - that you're saying the projected 15bn gap isn't included in the figures Chris has presented, because it isn't included in the budget projections? I find it more difficult to believe that a govt which has itself raise the school leaving age hasn't costed for that, but you never know.

In any event, whilst I can see the good sense in your general point about the unknowability of future spending requirements I do think these two factors are pretty 'knowable'.

[chris]

Sorry Charlie - that gap isn't included: I'm just taking government numbers at face value.
To be honest, I wouldn't even usually do this. There is, as Roger says, tons of uncertainty surrounding these figures - and the further out the projections the more uncertain they are.

[Michael Kerr]

Thank you for this - it seems very sensible. What politician will conduct the debate in these terms? Certainly not the Prime Minister!
I wonder what will be the effects of:
1. Servicing PFI costs. As I understand it these are from current expenditure and are rising much faster than inflation. It is unlikely these can be lowered. If this is the case then they will reduce the money available for front-line services.
2. Paying pensions to retired public servants. This is another area of current expenditure rising very quickly and thus likely to detract from the pot available to provide services. There is some scope for action here but it would take a brave government to take it.
I suppose I am saying that things are worse that you outline because of these large and increasing liens on current expenditure but I do not know what they amount to.

[Roger]

Why would PFI costs be rising faster than inflation?

Certainly every PFI contract I've seen has its annual unitary charge indexed to RPI - which will probably be negative for most of this year.

Theoretically therefore most PFIs should actually cost less to service in 2009 than in 2008.

I'll talk to an PFI SPV accountant I know and get some actual examples.

And paying pensions to already retired public servants - i.e. to people who've worked 30 or 40 years for mostly shit wages knowing that the only real perk of their goddawful job is that they will get an OK pension if they live long enough - is just not negotiable - these are legally enforceable contractual rights that the govt can hardly renege on.

Certainly the Tories will try and destroy these schemes for new entrants just as they've been destroyed for everyone except senior managers in most private sector companies - but in practice this will have little impact on costs for decades as new members are by definition not going to be retiring on a full pension any time soon.

So wrong on both counts.

[Michael Kerr]

PFI Costs. A report by Edinburgh University on NHS PFI costs in 1997 estimated that current costs were £470m p.a. and would rise to £2.3bn p.a. by 2014 as more projects were completed. This is a compound annual increase of 66%. The NHS represents about one third of all PFI
Public Pensions. The numbers of civil servants above the age of 50 grew from 88,000 in 1996 to 123,000 in 2006. Data for teachers, NHS workers, local authorities employees and other government emplyees show similar increases. At the same time average earnings for these people increased dramatically – average public sector earnings were 88% of private sector earnings in 1997 and were 102% in 2007. Future public sector pension liabilities are set to increase by between 10 and 18% p.a. over the next 10 years.

[zorro]

" this will have little impact on costs for decades"

So it's not worth doing? We're just supposed to keep on with this stupid Ponzi scheme and _hope_ everything works out in the end? With an _ever_ growing public sector under the dear leader...

[Roger]

Michael - thanks for citing your source - I am actually well acquainted with Pollock's Edinburgh paper and broadly agree with most of it.

However by mentioning inflation you made a basic category error - i.e. you are not comparing like to like.

To give a simple example, suppose that in year 1 I buy 100 pints of beer at an average cost of £3.00 a pint and in year 2 I buy 200 pints of beer at £3.30 a pint.

In this case I spent 120% more on beer in year 2 but is it correct to say that the cost of beer rose by 12 times the rate of price inflation (10%)?

Obviously not - the primary reason I am spending so much more on beer is not because its 10% more expensive but because I bought twice as many pints.

Exactly the same principle applies to PFI - costs have risen by double the inflation rate not because unit costs have risen but because the number of units sold has increased.

In fact if the govt could pitch us into a Japanese lost decade of minus-zero inflation rates, the unit cost of PFI - i.e. the average unitary charge as a percentage of scheme value - would decline quite significantly to the point of rendering the PFI's seriously unprofitable for the provider.

Which given the vast sums involved and the slavish devotion of all three major parties to the concept is probably the only way we can hope to get rid of PFI in my lifetime.

And contra right wing trolls, PFI is a Tory idea dreamed up by Norman Lamont with the explicit purpose of privatising the NHS, was first implemented under Major, has not the slightest resemblance to a Ponzi scheme and in most cases leads to a reduction in the both the number of staff employed by the state and the level and quality of services it provides.

For these reasons we can expect to see even more of it during the coming Etonian dictatorship.

[Roger]

On pensions if you are talking about 50+ year old existing scheme members these people can only be deprived of the pensions they are contractually entitled to by closing all schemes for both existing and new members.

To remove the increase in liability completely you would probably have to find some way of also reducing the pensions paid to scheme members who have already retired - as their stubborn insistence on living ten, twenty, thirty or more years after retirement is also huge factor in driving up that liability.

Much as the Tories and their cheerleaders in the media would love to do this even the supine leaders of our public sector unions could not tolerate this without calling a general strike.

With our poisonous media I suspect they'd lose and we'd end up even more fucked, but it would still be an extremely high risk strategy for the Tories and one they'll need an entire parliament to prepare for.

Oh and its been well established that the reason public sector pay has overtaken private sector is because so many lower paid state jobs have been transferred to the private sector through PFI and other outsourcing deals.

Teachers, nurses and so on are not really being paid radically more than they used to be (although due to New Labour incompetence NHS GPs and consultants certainly are) but becuase there are a lot fewer cleaners and binmen left on the payroll to drive average public sector salaries down.

I don't disagree that state pensions and PFIs will be huge fiscal burdens - however in neither case can I think of a just and practical solution that does not involve a (preferably moderately bloody) socialist revolution.

[Nigel]

The £15b gap in health is actually £8-12b in cash and calculated on the basis of the figures here, analysis by IFS and some conservative assumptions about health inflation. (I know this as I wrote the report.) Putting them in to this analysis would double count them.

Ageing is actually a small part of the story. Most of the pressure on the NHS will be from the drop in expenditure, inflation which tends to run ahead of general inflation (in all health systems), pay, technology, employers NI and rising demand - only partly linked to ageing.

To make £8-12 in cash to meet these pressures hospitals etc. need to be making significantly more than this in savings because of the high level of fixed costs in most services - hence the higher figure.

This is not a piece of NHS special pleading, the report that got all the coverage was written to signal to the NHS that they need to be ready for this what ever happens and whoever wins.

We didn't model the impact of swine flu which looks increasingly like it will be with us in a big way soon.

[JimH]

This is like the 'how many angels can dance on the head of a pin' argument. Does anyone REALLY believe that the figures produced in the last Budget will bear any resemblance to what actually happens? All the previous predictions have underestimated spending growth, and the size of the budget deficits. These figures will be no different.

We will end up spending more than we thought, get less tax revenue, and have to borrow even more than we ever thought possible. Hopefully the bond market will call a halt to the insanity and force whoever is in charge to raise extra revenue and cut spending to gain some semblance of control over the deficit.

[Alex]

"Having built a lot of schools and hospitals in 2008-10, we’ll not need to build them in 2011-14"

Er, what schools and hostpitals? The government wasted its Keynesian stimulus with a 70+% tax cut. It was hardly the New Deal.

[patek philippe watches]

This is just one idea, and perhaps displays no more than my limited imagination. If there are better ideas out there, that amount to more than "implement something called "market socialism" and then - alacazam! - full employment!" then I'd love to hear them. http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.
http://www.watchgy.com/tag-heuer-c-24.html
http://www.watchgy.com/rolex-submariner-c-8.html