Is the Government spending enough? Can we really not cut our way back to a surplus or is it time to spend to grow?

Both the general public and business leaders appear to want less Government spending…

The May general election in the UK appeared to give a clear message on the public’s desire for less Government spending. As the chart below shows the support for higher taxes to fund higher spending was close to historic lows during the campaign.

Public Spending

Source: NatCen, April 2015

The attitude of business leaders was very similar. An analysis by Chris Giles of the Financial Times in November 2014 identified that 84% of business leaders surveyed wanted the welfare budget reduced faster than government plans and 71% and 54% supported the removal of the international aid and  NHS ring-fences respectively.

The Conservative Party set out its plans for spending reduction throughout the election campaign. The election result suggests that the public accepted the arguments presented. However, sentiment may be changing.

…except when it impacts them directly…

In recent weeks the implications of exactly what people voted for have started to become clearer. This has led to a breakdown of sorts in the apparent consensus in favour of financial tightening.

As the detail of the proposed cuts to tax credits emerged, public opinion was equally split between supporters and opponents of the policy according to YouGov. And this attitude also seemed to have spread to the Conservative Party itself. Most recently, a ComRes poll for ITV found 53% of people opposed to cutting tax credits.

Business leaders have also been making their feelings known on The Government’s  agenda. The National Living Wage, positioned by the Chancellor in the last Budget as designed to balance the impact of Tax Credit Reform, has been challenged as being too high for some business sectors, but without this the challenges to reform Tax Credits will be even stronger.  Business Rates continue to be a source of contention and concerns over reductions in research grants and support for scientific research have now surfaced as areas of disagreement and concern.

…and more disappointment is likely…

The reality is that the planned reductions in public expenditure sit uneasily alongside both increased demand for spending in many areas and commitments by the Government to improve provision in key areas. With an ageing population, a workforce, according to business leaders, in need of better education and training, concerns over inequality and increasing security concerns after the recent events in Paris, the public tax and spending plans set out in the July Budget will almost certainly disappoint significant numbers of people.

The list of demands for resources goes on. The Prime Minister promised an additional £8 billion of support for the NHS during the general election campaign but even this is being challenged as insufficient. Plans to rebalance the economy towards the regions have led to a number of deals being signed but the required funding is still to be agreed in many cases. Moreover ambitious infrastructure plans still have to be funded. The Government has made many promises to provide resources in valuable areas, but there may well be a mismatch to the proposed plans to limit expenditure.

…if the focus stays on costs…

The UK debate on public spending invariably starts with finance not strategy. We have heard various assertions around the UK not being able to afford more public spending with “the markets” often cited as the key reason. However, the UK can currently borrow from these markets at very low rates. On current plans, public spending as a share of GDP will fall to just over 36% by 2019, an extremely low ratio in UK economic history. This level of spending is a political not an economic target that seems out of step with the demand for services

…rather than opportunity cost.

There is an implicit, or sometimes explicit assumption, that if government reduces its activity, the private sector will do more to fill the gap. The current situation in respect of infrastructure, training and skills, investment in R&D and many others would suggest this is not the case. A more realistic model is one that accepts both that government spending is required to incentivise risk capital and that there are areas that only government can provide key elements of, such as funding for basic research.

Given the accepted need for improved and increased infrastructure, the need for more investment in health and social care, challenges in education and increased security concerns, all against a backdrop of the need to drive higher productivity, now would seem to be the time to go back to first principles and assess if increased spending could drive faster economic growth over time. With funding available at low rates, the potential return to society is very attractive and by cutting expenditure rather than investing, the UK is missing out by failing to recognise the opportunity being foregone.

Time for government to consider spending more to boost growth.

An approach of reducing spending to bring public finances back to balance and to reduce the overall level of debt extremely aggressively is very challenging. Just as corporate cost reduction has failed to boost UK productivity, so a failure by the public sector to invest will limit the UK’s rate of growth. A faster growing economy is one in which it will be much easier to improve public finances over the medium to longer-term. Current policy is only using a fraction of the tools available to reform the economy over time. The UK needs a strategy for public sector reform not an expenditure programme.


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