Spending cuts and the UK elections

Channel 4 broadcast the first honest and accurate election programme I’ve seen on Sunday evening. ‘Election Uncovered: What They Won’t Tell Us’ was an attempt to talk about the scale of financial stringency that is going to be needed after the election, what scale of cuts might be and where they might fall.  It was a curious programme, more  reminiscent of the ‘Hypotheticals’ Granada TV produced in the 1970s and 1980s than anything else – except that its subject matter is not a ‘what-if’, but what will be happening in a few weeks or months’ time.  And there was a huge divide in attitudes between the politicians on one hand (well, Michael Portillo and Charles Falconer – Shirley Williams was an honourable exception) and the experts with professional knowledge – two former permanent secretaries (Richard Mottram and John Gieve) and two eminent academics (Howard Glennerster of LSE and Colin Talbot of Manchester).  The politicians think cuts must be minimised, and there will be little or no fall-out from those that do happen.  The civil servants and academics point out the scale of cuts, the limited options available for those, and the serious consequences of making them.  It’s the closest examination that there has been so far of the most important real political issue of this election.  Details are here, and it should be available from 4oD soon.

So far, this has been a lamentable election campaign.  The campaign in the media – the debates, the press coverage – have mostly taken place in a Wonderland where there may be somewhat tough times coming up, but nothing too tough, and no hard choices to be made.  Things will be pretty much the same, but slightly better.  As a result, we’ve had spending commitments aplenty, and promises of all sorts of changes in how various services work.  None of this bears the slightest relation to reality.

In reality, what is coming is very tough.  There’ve been hints of that in what some politicians have said (Alistair Darling has been one of the few candid politicians), but only in the last week or so has the gaffe been properly blown on that.  Thanks to the UK’s two most eminent economic think-tanks – the Institute for Fiscal Studies (see papers here and here; all their election analysis briefings can be found here) and the National Institute for Economic and Social Research (see press release here) – we have both a measure of how far off the mark the parties’ positions are, and the scale of the problem.  Add to that the private remarks of the Governor of the Bank of England  (reported here) about the political consequences of cuts keeping the party responsible out of office for a generation.   At least it’s now obvious that there is an elephant in the room, even if what politicians are saying suggests it’s not much more than a small okapi.  This is hugely regrettable, because with hindsight this will probably have been as decisive an election as 1945 or 1979.

I ‘m sure I’ll be writing much more about cuts, and their implications, in coming weeks and months.  But at this point, it’s worth making three big points about the political implications of what is looming.

First, there isn’t much of a playbook about how to restrain spending, and not much of an academic literature (but this book by Andrew Dunsire and Chris Hood, drawing on British experience in the early 1980s, has just come back into print).  We know it’s very hard to make real cuts, especially if the goal is to reduce public spending as a proportion of national income as many on the right wish.  Mrs Thatcher’s governments never succeeded in that; the proportion had come down by the time John Major left office, but as a result of economic growth rather than spending restraint.

One of the big choices is between trying to make generalised cuts across the board, which limits their effect on the state and the relationship with the citizen but also means that the political pain is widely spread, and making deep cuts (or particularly deep cuts)  in some areas or programmes.  The evidence from Canada’s experience in the 1990s suggests that this second approach is much more effective in actually reducing a deficit than trying to share the pain.  We’ve already seen how the BBC and the Foreign Office have responded when subjected to the most minuscule of reductions, offering as victims cheap but popular and effective activities and provoking huge public outcries.  (I’m thinking of the cut in counter-terrorism activities in Pakistan, in the news in late January, and the termination of BBC 6 and the Asian Network.)

Making a serious effort to reduce public spending affects policy choices, not just in obvious ways (like choosing whether education or health should be made a priority).  It affects the instruments available to make policy and deliver services as well.  For example, saving money and running market-style competition in public services are directly in contradiction with each other.  A pseudo-market requires spare capacity in the system as a whole, which (in the case of less effective providers) will be unused.  That wastes money.  It means hospital beds or school places in ‘poorly-performing’ schools or hospitals sit around unused.  There may be merits in such an approach in improving efficiency in public services generally, but it is a slow and expensive way of doing so in particular institutions.  Do we think we can still afford that?  Or: one of the greatest distractions for ‘frontline’ staff in providing services is the bureaucracy that comes with the need to keep records to evidence their work, and prove how they are performing in relation to their targets.  Cutting the number of targets might help a bit, but won’t alter either the managerial bureaucracy or the fact that staff have to shape their work around the targets.  An effective way of increasing efficiency in service provision would therefore be to drop targets altogether.  That, of course, will mean that no-one can tell if services are performing efficiently.  Would we rather have an efficient service, but not be able to prove it, or take money away from providing services to show how ‘efficient’ those services are?

Second, if government does cut deep in some places, the choices it makes will shape not only the next few years, but the future we know for at least half a generation.  Changes in how much the state spends and on what, and in what the state raises by way of tax and how, fundamentally shape (and reshape) the relationship between the state and its citizens.  This will be dramatically changed in the next few years.  That relationship will probably be very different in the next decade from what it has been in the last.  That in turn will have all sorts of implications for how the state works

As an aside, this also has an implication for electoral choices.  Voters might reasonably expect to have been told by the parties what the choices would be.  Parties might not be able to make firm electoral promises, but they could have indicated their priorities.   Since they haven’t, voters will have to make their choices about who to vote for more or less blind.  It might be plausible to expect Labour to look after public services and the Tories to be keener on tax cuts, but that can based only on voters’ assumptions not the unequivocal statements or commitments of the parties.  Essentially, voters are being asked to make some huge judgements based on nothing more than trust,  when most of what the parties have said during the campaign, and pretty much everything in their manifestoes, cannot be believed.  And this is at a time when trust in politics, and politicians, is already at a low ebb.  That is a huge strain to submit the political system to.

Third, these choices – about where, how and when to make spending cuts, and where and how to raise taxes – have effects territorially as well as in other ways.  These effects depend on whether the programmes or services involved are UK-wide or devolved to one or all devolved administration.  If they’re devolved, a cut will apply directly in England only – but will also affect devolved budgets through the Barnett formula.  The devolved administrations will have to decide whether to cut the service that is being cut in England or something else.  And depending on the nature of the cut and the arithmetic, even if spending is cut in the devolved parts of the UK, it may be cut by less than spending in England and so increase disparities in levels of spending across the UK.  (I argued that earlier here; it’s been echoed recently in an IPPR paper, available here, and summarised in a press release here.)

On the other hand, cuts in UK-wide spending will also have effects.  Imagine a serious reduction in the size of the armed forces; that will affect many people in Scotland who might otherwise sign up.  (Scots enlist disproportionately, compared to their share of the UK population.)  Cuts in submarine numbers will affect the bases at Rosyth and Faslane.  Cuts in general resourcing may affect the Defence Academy at St Athans.

This gets even worse if one starts to eye up the social security budget for cuts – tempting, as it accounts for about one-third of total public spending.   About a third of that is old age pensions and benefits; but the rest still accounts for nearly 20 per cent of spending.  Cuts in that may offer ways of reducing spending generally (although they’re often even tougher than they look).  But social security is part of the cement of the Union; it’s something that the Union palpably does for everyone, regardless of where in Britain they live (and which it pays for to operate on a basis of parity in Northern Ireland).   It may be based on personal status and entitlements rather than geography, but it’s a major way of redistributing money from richer people (and areas) to poorer people (and areas).  The Calman Commission shied away from considering any alteration to the UK-run nature of the welfare state as a result.  Even if changes to the welfare state apply equally across the UK, they will have the effect of reducing the shared interests that people across the UK have.  This will be all the more true if parties in Scotland, Wales or Northern Ireland are able to argue that they would do something else if they got the chance.  It will be easy to mobilise such opposition territorially.  Moreover, all this will be happening at a time when the consitutional debates are also very lively, and will play into them.

There are no clear answers to these questions.  Indeed, at this point the questions themselves aren’t very clear.  But these issues are going to be among the ones that will dominate not just economics but politics in the coming years.

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Filed under Devolution finance, Policy issues, UK elections

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