Osborne's spending paradox

In the Times yesterday, Daniel Finkelstein pointed out that most of the squeeze on public spending has yet to happen: "The big battle is only just about to begin" he said.

He's right. OBR data show that since 2009-10, total spending spending fell by only 3.5 percentage points of GDP to 43.5%. But it's projected to drop by another 5.5 points by 2018-19. That would take the share of public spending in GDP to its lowest level since 2001-02, and lower than anything we saw in the Thatcher years.

This raises a question: why hasn't the government made more of a case for a smaller state, preferring instead to stress the need for fiscal austerity? It's failure to do so has drawn criticism from both right and left. Allister Heath has asked where Osborne's vision is, and Phil has written:

The deficit (which does need sorting) has been a policy drawbridge across which Osborne and Dave have marched a phalanx of ideologically-driven cuts to public spending.

To an economist this seems an inversion of logic. The claim "we need to cut spending to reduce the deficit" verges on the nonsensical: see Simon Wren-Lewis, passim. But the claim "a smaller share of government spending in GDP would be a good thing" is if not correct then at least more intelligent than deficit fetishism. You can point to evidence that smaller government promotes economic growth and perhaps even happiness. You could argue, McCloskey-style, that a smaller state and bigger market sector would eventually promote bourgeois virtues. And you could, following Vito Tanzi (pdf), contend that there's no link between public spending and various measures of well-being: Japan and Korea, for example, combine small states with reasonable income equality, and there are good reasons for leftists to favour a smaller state.

This poses the question: why does Osborne - and the coalition generally - use bad arguments for cutting public spending when better ones are available?

One possibility is that the UK has a social democratic culture, so explicit arguments for a smaller state won't wash: the Overton window doesn't exclude merely leftist ideas. This, though, runs into the problem that Osborne merely plans to take the share of public spending in GDP to slightly above the level it was under the first four years of Gordon Brown's chancellorship. That's hardly swivel-eyed minimal statism.

Here, then, are three other possibilities:   

 -  The secular stagnation hypothesis might be right. The private sector might have been vibrant enough to fill the space left by a shrinking public sector in the past, but it's not now.

 - Politicians have lost the ability to argue about values such as the size of the state, and prefer to hide behind pseudo-managerialist gibber about the "necessity" for cuts. An appeal to the deficit bogeyman fits this preference better than the ideal of a smaller state.

 - We can't rely upon efficiency gains to offset spending cuts. Danny calls for "relentless pressure on the public sector to provide the same services for far less money." But this pressure might fail because of counter-pressure from bureaucratic capture or Baumol's disease, or simply because of bounded managerial ability. If so, a smaller state means worse public services - and that'll take some justifying.

I'm not sure what the answer is here. But I'm pretty sure that there's a paradox here, that bad arguments for shrinking the state are preferred to less bad ones.

Comments

[Ralph Musgrave]

Chris,

Your concluding paragraph is right: “bad arguments for shrinking the state are preferred to less bad ones.” The same phenomenon is observable worldwide, i.e. the political right worldwide is using homely stories about the need to cut deficits and debts as an excuse to cut public spending as a proportion of GDP. Voters understand homely stories.

Re your suggestion that “The secular stagnation hypothesis might be right.”, I strongly disagree. There is absolutely no problem in inducing the private sector to spend enough to bring full employment: just stuff its pockets with money.

[Dave Timoney]

Perhaps the Tories are not sincere in their desire for a smaller state. Certainly their record since 1979 would suggest they actually like a big state, albeit one in which power is centralised and services are contracted-out to business.

In fact, the state's share of GDP has been pretty consistent since 1945, with the major secular shifts largely cancelling-out: the increase in health and pensions has been offset by a decrease in defence. http://fromarsetoelbow.blogspot.co.uk/2013/11/the-state-were-in.html

The only real change was the privatisation programme of the 80s when activity (i.e. both tax and spend) was transferred to the private sector, notably housebuilding, nationalised industries and transport.

Since then, "privatisation" has actually come to mean outsourcing, where we transfer service provision to privileged corporations but guarantee revenues through taxation. This does not affect the state's overall share of GDP (and also means it can claim the NHS is not being sold off).

Making a case for a smaller state increasingly means threatening the interests of incumbent suppliers like G4S and Serco. In contrast, deficit reduction provides cover for re-tendering (much worse services at marginally lower prices) and further outsourcing.

Danny Finkelstein is just providing ideological cover for a squalid stitch-up. You don't get a peerage for asking awkward questions.

[Socialism In One Bedroom]

I can't see the link between positive economic outcomes and a small state. On virtually every measure of quality of life, 'big' state nations come out on top.

Austerity is about externalising costs, cuts to the NHS and care for the elderley have very real affects. Abstract argumets about small v big state misses the point in my opinion.

Also, I think part of the project is to use more tax money to help provide a welfare system for the rich/capitalist class and move money away from the most vulnerable in society.

"relentless pressure on the public sector to provide the same services for far less money"

New Labour actually introduced this in around 2003 after Gershon. You had a systematic approach.

The Condems have replaced this systematic approach with total chaos, and an ideological mantra - vut cut cut and to hell with the consequences!

[Ralph Musgrave]

Chris’s 2nd “possibility” at the end of his article very nearly captures what’s going on. Same goes for my above comment. But neither of us have got it quite right.

I don’t agree that Chris’s “managerialist gibber” is a phrase that is relevant here. And I don’t think I was right to suggest that the political right AS A WHOLE is hoodwinking the political left. Rather, what’s going on is as follows.

95% of politicians and 95% of the population as a whole, and about 50% of economists believe in what Chris calls the “deficit bogeyman”. The really smart people on the political right (that’s 5% of them at most) realise that the deficit is not a problem, but they pretend it is, because it helps them argue the case for public spending cuts.

As to the really smart people on the political left (again, no more than 5% of them), they daren’t suggest the deficit bogeyman is unimportant: that would turn 95% of voters against them.

[theOnlySanePersonOnPlanetEarth]

"95% of politicians and 95% of the population as a whole, and about 50% of economists believe in what Chris calls the “deficit bogeyman”"

The percentages are as follows:

87.654269% Politicians
84.865257% Population
49.175249% Economist

0% *Really* Smart people on the right
0.0000000000001% *Really* smart people on the left (Thats me)

[Steven Hope]

Framing it as the need for austerity makes the cuts the solution to a mess created by Labour. It makes the cuts a painful necessity. Framing it in terms of the benefits of a smaller state separates the problem from Labour and makes the cuts ideologically motivated. Thatcherite. So hands an open goal to Labour.

[greg]

Government must be large enough to perform one of its most important functions, which is to consume excess production, and so maintain price levels.

See:http://anamecon.blogspot.com/2012/07/one-of-main-functions-of-government-is.html

Doing so, government acts counter to the business cycle, and it must be flexible enough to grow and, during good times to shrink, accordingly.

An austere government in hard times aggravates the downturn.

As for the politics of the thing, economic arguments are often pretexts for pandering to interest groups. There is increasingly only one with influence, the wealthy, whose only thought is that less taxes (on themselves) are good, without any consideration for the society those taxes are needed to secure.

[Simon Reynolds]

theOnlySanePersonOnPlanetEarth,

I like your comments here, but your figures underestimate the number of really smart people on the left by several orders of magnitude.

If you really were *Really* Smart you'd know that even if the entire population (7,000,000,000) of the planet were on the left (they are not) then 0.0000000000001% of them would be 0.00007 people.

[Mark]

There may be a need to update Marxism to reflect the realities of the 21st century, in which the state is an additional capturer of the value created by labour.

Visceral Tories talk demonise the public sector; the more intelligent ones focus their bile on the highly-paid, often paid-off senior managers in the NHS and local authorities, the quangocrats and their like. Those on the left prefer to criticise the giant outsourcing firms that capture state expenditure, overlooking the number of former Labour ministers who end up with sinecures with such firms.

It is not so much greater efficiency that is needed in the delivery of public services as the elimination of this form of usury.