Are cuts "feasible"?

On the Today programme this morning, Ryan Bourne said (2'38") that spending cuts need not have "hugely detrimental effects on the public services":

Other countries spend significantly less as a proportion of GDP than the UK. It's a question of political will as opposed to economic feasibility.

I'm not so sure.

First, though, some context. Current Tory plans envisage cuts in public spending, but with health, education and overseas aid protected. This implies large cuts elsewhere. As the OBR says:

By 2018-19 the [resource departmental expenditure limits] for unprotected departments would be 5.4 per cent of GDP, little over half the level spent in 2013-14 and less than half the level spent in 2010-11...In real terms...total RDEL spending in 2018-19 would be 22 per cent down on 2010-11 and for the unprotected departments down 45 per cent. Adjusted for the ONS’s specific deflator for changes in the price of government consumption, the declines would be 9 per cent and 36 per cent respectively. (Par 6.16 of this pdf)

The IFS numbers are quite similar. So, is Ryan right that this is feasible, or is it instead "brutal" as Rick says?

Three things speak in Ryans' favour, but I'm not convinced by any of them.

1. The cuts envisaged for 2015-16 to 2018-19 are a bit less than those we've already had.

I'm not sure, simply because we should have picked the low-hanging fruit by now, and further cuts will be harder. Also, whilst one or two years of pay restraint is feasible - especially when private sector wages are squeezed - it's not obvious that many such years are possible.

2. There have been cases of big cuts in public spending without disastrous effects around the world.

However, many of those cuts came from lower interest and welfare spending rather than departmental spending. And they came at a time when the macroeconomic environment was conducive to the possibility of expansionary fiscal contraction.

3. As Vito Tanzi and Ludger Schuknecht have shown, newly industrializing countries, such as South Korea, have combined low public spending with good social indicators.

The problem here is path dependency. It might well be possible to have small effective government if you're starting from scratch. But we're not. And big government can lead to big government for at least two groups of reasons:

- Vested interests. Years of big government create a client base for big government and thus pressures to maintain it. I'm not thinking here merely (or even mainly) of public sector unions. There are also capitalist interests in favour of big government, not to mention public sector managers who have more incentive to maintain their positions than to enhance efficiency.

 - Cognitive limits.The difficulties the government has had with Universal Credit and free schools shows just how hard it is to actually implement change. And whilst it is possible in theory to cut waste, the (correct) Hayekian strictures that central planners have bounded knowledge warns us that waste can't be identified from the top-down.

I say all this for two reasons. First, to note an irony: the same free market theory that calls for spending cuts also tells us - through the economics of public choice and bounded knowledge - that such cuts are hard. Secondly, to note that if cuts are to be reconciled with decent services, the solution might lie in abandoning top-down managerialist conceptions of how to run those services.

Comments

[Ben]

I live in Canada where govt spending as a % of GDP is about 42%. In the UK it's 48.5%.

Life here is far better. Public services are way better. Schools are way better with lower class sizes.

The UK has worse results for the same reason Kenya has bad results - it's a total mess.

[An Alien Visitor]

I guess, for one thing, it depends what they spend the money on! For example the UK government spends more on the military than Canada.

The problem with the idea that cuts don't lead to a detrimental affect on services is that no one is really measuring this. And once a service has gone then that service is not measured. So the statement that cuts don't have detrimental affects on services is counter intuitive speculation, usually done in order to pull the wool over people's eyes.

Couple of examples re buses:

There used to be a free bus between the city centre where I live and a shopping complex. This was then axed. The service no longer exists at all. No paper will ever document this but when a service existed and then it no longer does I would call that quite a detrimental affect!

Also I tend to be the last person on the bus, as my home is one the last on the round, this service has been cut back, less frequent, stops at less places. Are you telling me that anyone compiles stats to document this reduction in service?

[Andreas Paterson]

I'm pretty skeptical over promises of both small government and good public services, there are almost certainly inefficiencies but in the UK's public services they don't seem all that big. There's the bureaucratic inertia you'd expect in any large organisation but there are limits to what you can really do about this. I'm not sure how much more waste the government might be able to cut.

I also wonder to what extent the international comparisons consider compositional (public/private healthcare, pension arrangements) and demographic (older countries have larger health & pensions spending) differences between nations.

[Martin Connelly]

I agree with Ben, its pretty easy to find countries that spend less per GDP and yet provide better services. Also easy to find countries (certainly in the past) that spend much more of their GDP on public services and yet provided far worse services.

[Luke]

"..its pretty easy to find countries that spend less per GDP and yet provide better services. "

I'm sure that's true, but I wonder how many have considerable natural resources - eg Canada and Norway. I'm not sure how happy Alberta is at subsidising Quebec.

http://en.wikipedia.org/wiki/Equalization_payments_in_Canada

[Richardvadon]

"Though the number of people working for the government fell by 6.4% between April 2010 and April 2012, the government public pay bill (central and local) actually rose by 2%.

That translates into a 9% rise in earnings per head over two years - three times more than the OBR forecast in 2010."

http://www.bbc.co.uk/news/business-20561444

[Path_dependent]

The long term trend in UK public spending is around 40% of GDP. It’s disingenuous to bandy around the post-crisis 48% as evidence that the UK overspends. GDP collapsed after 2008 and hasn’t recovered – spending is obviously going to form a bigger slice of a shrunken income.

[Alex]

"3. As Vito Tanzi and Ludger Schuknecht have shown, newly industrializing countries, such as South Korea, have combined low public spending with good social indicators."

This is demographics isn't it? The ROK industrialised on a huge baby boom/demographic dividend. Young people don't draw pensions or have major surgery, as a first approximation. Similarly, it targeted full employment and as a result didn't have a rustbelt to pay for. These countries did the demographic transition very hard and early, and as a result they have huge public debt (both driven by spending, and by the private sector's need to save).