Memo to Mr Osborne: State Spending Is Still out of Control

I’m still at a loss to explain why in a healthy economy our GDP could be growing at between 2 and 3 per cent annually, yet our debt is still mounting.

This was Matthew Parris in his column in The Times last Saturday[i]. I respect Matthew as a highly intelligent writer, though as he admits in his column, he is no economist. But in writing this, as so often, he has put his finger on something important. After the financial crisis of 2008 and its horrible aftermath – a sustained recession – we all thought that a return to economic growth would set us right.

Well, more than four years into the upswing, and with our economy in the UK outpacing most of Europe’s by a wide margin (mind you, Ireland and Poland are putting the Southern laggards to shame) our national budget deficit this year is likely to exceed last year’s. So the national debt, as Matthew rightly states, is climbing. And as I have recently reminded readers of these pages, our debt-to-GDP ratio continues to deteriorate – though we have some way to go in this regard to catch up with our French neighbours.

Before New Labour and Gordon Brown’s 10-year spending splurge, the prevailing orthodoxy of government financial management, here and abroad, was: run surpluses in good times and deficits in bad. Gordon Brown, however, believed, like everyone on the left, that all “outcomes” (the great New Labour buzzword) could be improved proportionate to the amount of extra money spent on them. So Mr Brown presided over a 60 per cent increase in the budget for the National Health Service. Did “outcomes” in the NHS improve by 60 per cent? I’ve never met anyone who thinks so. No, UK doctors’ salaries more than doubled – indeed they became the richest doctors in Europe. And yet the major structural problems and bottlenecks within the NHS persisted, as we know.

In fact, Gordon Brown’s spending bonanza cost the country, according to one professional estimate, about £1.3 trillion – that’s about the entire size of the British economy at the time that he was in charge. I refer to a brilliant book published back in 2008, Squandered, by the eminent management consultant David Craig[ii]. In Craig’s view New Labour presided over a massive expansion of state bureaucracy with very little by way of improved public services. The UK tax regime became more complicated and more difficult for ordinary citizens to comply with. Quangos – state-sponsored public bodies – proliferated on a historically unprecedented scale.

Regarding quangos, this is a scandal which is yet to be fully exposed, in my view. By delegating critical governmental decisions to stand-alone pseudo-governmental agencies, politicians could abnegate responsibility for poor governance. At some point in the New Labour era responsibility for the planning of flood defences in England passed from the Ministry of the Environment Food and Rural Affairs (DEFRA) to an obscure body called The Environment Agency, run by a succession of three-day-a-week political and industrial has-beens with supposedly good connections in the world of PR. (Though they didn’t do Sir Philip Dilley much good – he was forced to “step down” on 10 January). Does anyone really believe that this is a better way of managing an economically vital activity?

Now you may think that David Craig and others have a political axe to grind. But most of those on the left still believe, deep-down, that the solution to nearly every perceived problem is to spend more money (and that this money should come from “taxing the rich”). Yet anecdotally, waste is still endemic in our public services, not least in the NHS.

If you ever manage to speak with those who work in the NHS (especially after the medically inadvisable consumption of alcohol) they will admit it.

Just one small personal vignette. Last year, the elderly mother of a friend of mine unfortunately fractured her tibia. After a spell in hospital she was discharged on condition that she went to stay with the family of one of her sons. The family was equipped by the NHS with a hospital-style electric bed, hoist, mobile commode, the full medical Monty. Wonderful. And thankfully, the lady fully recovered and was able to return to live in her own flat. But six months later, her son’s family are still pleading with the NHS to remove the hospital bed et al. So that’s maybe £5,000 of state-owned kit abandoned when it could be in productive use. I find that shocking. But then I am old-fashioned.

One reason why our national services are endemically wasteful is the system that has evolved in Whitehall for fixing departmental budgets. When management consultants seek to eliminate waste in organisations they adopt a system called zero-base budgeting – every year the last year’s budget is trashed and a wholly new budget determined, every element of which has to be rationalised anew. But Whitehall departments usually negotiate budgets on the basis of percentage increases (and more rarely decreases) that the Treasury, after admittedly hard bargaining, will permit. This permits pockets of wholly unproductive spending to persist indefinitely.

By the way, the “devolved governments” don’t even have to go through any budgeting rigmarole. They just get “block grants” according to obscure formulae which even EU bureaucrats would struggle to understand. Scotland will soon have “financial autonomy” but with no incentive to spend money wisely. Once again, Mr Cameron is storing up truly terrible problems for his successors.

So let’s go back to Matthew Parris’s problem (why is our debt still increasing while the economy is growing?). My answer is simple, but worrying: State spending is still growing faster than the ability of the state to afford it.

Remember the Tories’ manifesto during the General Election; remember the solemn words about the need to tighten our belts and to reign in our national spending habits. What happened to the £12 billion that was going to be squeezed out of the welfare budget and the 20-40 per cent departmental cuts? Was all that just a Corbynista’s bad dream?

I am coming to the paradoxical conclusion that the government of 2010-15, despite the participation of Mr Clegg and co., was a Tory government of sorts, but that the current Tory majority government is some kind of secret left-of-centre Coalition. Why? Because the spending plans unveiled by Mr Osborne in his Autumn Statement of 25 November, now considered, increasingly resemble something that could have been cooked up by Liberal-Democrat (Sir) Vince Cable and the Labour Blairite Liz Kendall over rounds of non-alcoholic beer and gluten-free sandwiches.

UK government expenditure is set to rocket during this parliament. Even next year it will reach £850 billion – a level that will make Mr Brown look like Ebenezer Scrooge.

Just consider the projected increase in the budget for that most dubious of government departments, because, explicitly, it does not benefit the British people at all. The Department for International Development (DIFID). Its budget is set to rise from £12 billion of your money now to over £17 billion in 2020. Tiny-minded Swiss bankers, who have never done anyone a kindness in their lives, are doubling their chocolate rations.

At the beginning of this parliament there was real hope. I wrote glowingly about Mr Osborne’s budget in July last year. (Mr Osborne’s Brave New World). I really thought that this was a new departure: a government tasked to put the welfare state back into its box, and yet not disadvantage anyone unduly. It was based on an innovative strategy: increase the Minimum Wage substantially, and cut in-work benefits (Working Tax Credit) progressively.

Alas, at the first puff of episcopal disapprobation, at the first sniff of a louche lord’s disapproval, the Cameron-Osborne pantomime horse abandoned the strategy. Now we shall have by far the highest minimum wage in Europe AND the most generous in-work benefits for the foreseeable future. That is an open invitation for the unskilled masses of Europe and the world to come here. And not a single Tory ninny has demurred in Parliament.

The Cameron-Osborne has meanwhile lost the plot on Europe too. So, fortunately, there is something we can do.  I’ll unpack that shortly.

[i] Lemsip Economics won’t save us from a crash, The Times, P21 Saturday, 09/01/2016

[ii] Squandered, How Gordon Brown is wasting over one trillion pounds of our money, by David Craig, Constable Books, 2008