Sep 14 2009
Wise spenders not big spenders?
Lord Mandelson has come up with a new mantra that could unite the Labour and Conservative front benches. Who could disagree with the latest proposal that we need a government capable of wise spending, not big spending? It is a shift from “Labour investment versus Tory cuts” which was never going to fly. People understand Labour does more than “invest” – it also spends, and wastes. They also understand that circumstances force all political parties to be cutters now, given the scale of the deficit.
I have some good news for the government. Switching to “wise spending” as code for making cuts leaves plenty of scope to do so without touching the job of a single teacher, nurse or doctor. Living through the era of big spending, as we are, all sorts of programmes and commitments have been entered into that go well beyond the wise, or often beyond the desirable. When will we get Labour’s list of needless or less desirable items? When will they announce the end of the much hated ID card scheme? When will they recognise the force of feeling on regional government, as expressed in the North East referendum, and start dismantling this needless unelected tier of bureaucracy? When will they cut back on the advertising, PR and spin budgets? When will they review how many special advisers and Ministers they need to spend wisely? When will there be a quango cull?
Meanwhile, expect plenty more nonsense about the Conservatives from the government. The language will be hyped just as the reality of the differences narrows. In place of “Tory cuts” we will now be told of “Tory slash and burn”, without a jot of evidence to prove such an allegation. I know of no wish by Conservatives to sack teachers, close the local hospital or otherwise remove important core public services.
The issue both parties face is the same. How do you control the budgets enough without damaging the services people value? The answer is you can, if you have a very different approach to public sector management and reform than has characterised the last few years. That has been one of the main purposes of this site, to set out just how you could do that if you wished.
The good news is both main parties now say they want to tackle the problem. The bad news is Labour wish to delay tackling it until after the General Election. The more you delay, the more urgency there has to be in sorting it out, and the more you need to reduce to compensate for the extra months of high borrowing.
We are constantly being told “it will be tough”, there will be “pain”. What do they think people have been experiencing in the private sector, where the relentless squeeze has meant all too many job losses, cancelled pension plans, and family decisions to remove items from family budgets because they have run out of money? There would be cheering in the streets if the government for its part announced a purge of the Ministerial travel plans, a reduction in the pay of bonus laden senior state bankers and quango heads, and the cancellation of surveillance and computer schemes which they put in to charge and annoy us.
Perhaps the last remaining disagreement between the two parties, other than the one over timing, is the issue of whether extra public spending and borrowing is reflationary or not. History shows that in the past the Labour IMF cuts, the Conservative 1981 budget, and the Conservative strict controls on public spending in the late 1990s were all important parts of the recovery process. Far from preventing recovery, controlling the public budgets aided the recovery. This recovery will take place thanks to the delayed low interest rates and belatedly easier money. It requires “wise spending” to sustain it, not over spending. If the government seeks to borrow too much for too long it will force up interest rates, undermining what recovery there is.
33 Responses to “Wise spenders not big spenders?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
I have yet to hear anybody in the Labour Party accurately describe the England I live in. I know there’s going to be pain – it’s been in my wallet for years, and I know it’s going to worsen.
Also, the only time to trust any praise (such as a description of “wise spending”) is when it has been applied by someone who can consider it independently. Perhaps if HM Opposition or the IMF were to describe the existing profligacy as “wise spending” I might give it some credence.
Self praise is no praise.
As a mere voter, I have gathered the following information, in trillions of pounds:
We face about one trillion pounds liability for public sector pensions, payable over the foreseeable future.
We face a couple or so trillion pounds if any of the nationalised or guaranteed banks goes under.
We face a totally undisclosed sum for PFIs.
We are already in debt to the tune of at least £0.8 trillion pounds and we are overspending by about £0.2 trillion pounds a year.
Our total governmental income from all sources, before the crash, was a mere £0.7 trillion.
Meanwhile, the private sector employs only about 15% of unionised people whereas the public sector has nearly half its workforce in unions.
The Labour party is broke now and depends almost entirely on the unions for its income.
Go figure.
“State investment” is an oxymoron. The State cannot invest. It can only use coercion to take wealth from the part of the economy in which it is created – the private sector – and spend it in ways that those who earned it otherwise would not. This mis-allocation of capital is the central fallacy upon which socialist, Brownian, economics is based and is an important root of the current economic crisis.
Central planning inevitably leads to gross inefficiency and inequity. Without the competition and pricing mechanisms that constantly inform Tesco or Sainsbury’s about where to build their stores, which products to stock and at what price, how can the central planner know, for example, how many doctors, nurses and teachers are needed, what their specialisms should be and where they should be located? Food is just as important as medical care to a person’s wellbeing (arguably a lot more important) but imagine what one might expect if there was a state-run National Food Service. Does anyone really believe that consumers would have the range, quality and keen prices that characterise today’s supermarkets?
So yes, scrap the quangos, ID cards and the surveillance society. Pare back central government and eliminate regional government. Reduce our “defence” spending by not agressing against other nations. But politicians of all parties should have the humility to realise that they do not have all the answers. In fact their answers are frequently the response to fallacious questions, posed by a media that is almost entirely besotted by state spin. In fact, the art of state spin has become so advanced that for the most part, the debate about the balance between state power and individual liberty has been forced off the airwaves and mainstream newspapers. Thank goodness for the web and sites like this!
Labour is introducing identity cards by the back door. With the latest rules on child protection, it seems that nearly half the population will need to be cleared, and as a result their identities will be held on a data base. Next they will be given a card to say that they’ve been cleared and will need to carry it at all times. What is this but a giant identity card scheme, and for which someone will say in due course “we might as well check the rest of the population, just to be on the safe side”?
Mike Stallard Reply:
September 14th, 2009 at 7:23 pm
I am so glad you brought up the matter of CRB checks.
At the moment, I do voluntary work, involving one small Polish girl of Year 8 and about 14 adults. I take a frail lady to Church. I try to teach art to people, some of whom are certainly “vulnerable”. Total cost to the Church: 3 x £64.
AND dammit, why should I prove to these people with their filthy innuendos that I am not a paedophile or necrophile?
Especially when I see Edward Balls leering over a child in a classroom, I really do hope that he faces a £5000 fine in October 12th. I really do.
One law for the Pure and Clean, another for the Great Unwashed……
Adam Collyer Reply:
September 14th, 2009 at 8:28 pm
Indeed, Brian. And it’s worse. The new Independent Safeguarding Authority is “independent” of government (i.e. a quango),and is not responsible to any one particular department. So no government minister can ever be responsible for its actions!
But apparently (according to its website) “performance, efficiency and effectiveness will be scrutinised closely by both government and stakeholders”. Yeah, right.
adam Reply:
September 14th, 2009 at 9:40 pm
ID cards havent gone away. Thats more lies from the New Liar party
Citizen Responsible Reply:
September 15th, 2009 at 8:36 am
This new quango, the ISA, which is tasked with vetting 11 million people and charging them £64 each for the privilege, looks like another government job creation scheme.
I don’t think the public are stupid enough to miss Labour’s desperation to jump on the spending-cuts bandwagon after initially claiming that they will keep increasing spending – until the newspaper polls told them that voters didn’t actually want them to.
Mandelson is desperately fighting Brown’s corner when Brown himself hides away in Downing Street. If this continues for much longer, people might start to think that Brown is afraid of facing scrutiny on public spending….
A while back JR, you mentioned it was possible to have a Prime Minister that sat in the House of Lords. I am starting to wonder if Mandy may be such, in the near future. He seems to have replaced Brown and Darling for most intents and purposes for ZaNuLabour. I don’t think that will sit well with the current Trade Union Baron Renaissance. I see DC is putting Big Ken up against him on R4 today; great stuff. Anyway; this post and your last make sense, as usual, but I have I have a small quandary.
Whilst doing my teach yourself macroeconomic project, I have become a fan of Steve Saville. Some of his subscription stuff is featured on the following site. I recommend Redwoodians read all his 2009 stuff at least.
http://dollardaze.org/blog/?page_id=00001&cat_id=69
My quandary; his article, “Bank Reserves and Inflation”.
http://dollardaze.org/blog/?post_id=00688&cat_id=69
(Quote). “To put it another way, any amount of bank reserves can now support any amount of bank deposits. This, in a nutshell, is why it makes no sense to agonise over what will happen to today’s unusually large quantity of bank reserves as if the inflation/deflation issue hinged on the result”. …………….. (Discuss, marks will be given for initiative, show your working, only exam approved calculators may be used).
Mike Stallard Reply:
September 14th, 2009 at 7:26 pm
I am going the other way myself. If I don’t understand it, then it is probably hokum!
If banks lend appreciably more than they have in credit, then surely people will distrust them and there will be a run which will make the politicians take fright and close them down?
Sadly, the Conservative ability to better manage our economy may be beyond them, come their next period in office. I am concerned that Labours’ scorched earth policy is too damaging to recover from.
I’m just reading Brendan Barber’s speech to the TUC congress.
He says, “Britain cannot afford to write off another generation to mass unemployment. And that’s why I am so horrified when I hear the Conservatives talk of public expenditure cuts which would turn any progress towards economic recovery into a nosedive back into recession”.
This is the same ridiculous argument which Mandleson made on Radio 4 this morning. For once, Nick Robinson appeared to undermine the New Labour position.
You say that, “Far from preventing recovery, controlling the public budgets aided the recovery [-ies in the late 1970's, 1981, and the late 1990's]“.
Your economic analysis is manifestly true, and it seems from the opinion polls that the British public are just beginning to accept it.
I believe this simple “economics 101″ message, so similar to Mrs Thatcher’s allusion to household budgets, and to Sunny Jim’s “I tell you in all candour, you can’t spend your way out of a recession”, needs to be repeated ad nauseam.
I for one will only get sick of it once Mr Cameron has sorted out the budget deficit.
It is a better line than cuts-v-investment but it is still fundamentally flawed. The argument is that the party that is responsible for this “unwise” spending is the party best placed to end it. This is like saying Sir Fred Goodwin was best placed to sort out RBS. It is an absolute denial of responsibility for past actions and their consequences. I fear you are being optimistic about no doctors and teachers being affected but that should certainly be the (nu-lab speak) aspiration!
Wise spending should not just be confined to large Government projects it can and should be a process that every single government employee (in the widest sense) is involved with.
Everyone knows that State expenditure has to be cut and that wise spending will reduce the pain and obviate the need to affect any front line services.
Whether it is a huge new project, an existing huge project (for example the NHS computer system) right down to the smallest expenditure, for example new road markings or signs, a replacement for a Council road sweeping vehicle there is a very simple test.
Is the expenditure Desirable, Necessary or Essential. At this stage, whilst our finances are quite so dire only Essential expenditure should go ahead. As things pick up then we can advance to Necessary items and maybe when finally hit the sunlit uplands of a balanced budget look to the Desirable items.
This test is simple but totally effective and if genuinely applied across the board could make a huge difference. In the same way as President Obama was able to raise vast funds from many small donations so vast savings could be made from looking after the pennies.
The widespread use of the simple test could also be a great way to unite the country behind the idea of everyone helping to deal with Gordon’s Black Hole.
The more one thinks about this simple test the more it dawns that it works everywhere: Regional Government, Desirable/Necessary/Essential, none of these – it goes; Crossrail, Desirable/Necessary/Essential, Necessary – it is postponed. Say a sign proclaiming a County boundary is deemed Essential (I can’t imagine why but stay with me) the words ‘Welcome to’ or ‘Jane Austen Country’ or a County Crest are not Essential and should therefore be omitted reducing the cost of the sign.
Like all great ideas the more you try it out the better and stronger it gets. Indeed if we could change the psychy of ALL State employees we really could reduce costs without affecting services.
Try it.
Mandelson’s speaking in coded form to the unions, despite his message ostensibly being directed at all of us. Already, on day one of the TUC conference, the Tories’ spending cuts are being attacked because they will bring misery to “another generation” which will suffer mass unemployment. What do they think is happening now?
Having read your blog first thing, and then listened to PM on the telly, I’ll take the “Tory Slash and Burn” please. God it was like listening to Goebbels or Comical Ali, the reckoning can’t come soon enough!
Oh Dear Mr Redwood,
How I wish I could share your optimism that this is a managerial issue where better management (by you) could right the incompetence of current management (them).
And wouldn’t it be loverley to imagine that left and right were now (thanks to Mandelson) only divided by an obscure Keynesian point about reflation, debt management and the money supply, and a question of timing and reassurance of the bond market.
It’s more serious than that.
You know (and can’t say) and we know (I dare say) that cuts will have to be savage, undoing all the work of G Brown’s extra 600,000 civil servants. Where a bleeding stump appears, we will have to hack at it again, until we have purged the non-productive sector of its fantastic over-manning and over-privilege.
Your faith in management is touching, but do you really believe that you can measure the competence and added value of each and every one of the 5,600,000 civil servants, all of whom are in line for the chop? Even your managerial skills, I suggest, may be taxed to the limit by this task.
To do so, you would have to hire some extra help in the form of consultants, task forces, special measures… Well, we’ve been there, Labour’s done that.
Speaking as one who’s been fired more times than he cares to remember (“You’ll never work in this industry again… until we need you”) I would say that injustice in shaving the head count is the essence of making the cuts palatable. Which would you rather have as a goodbye interview: “We identified you as useless” or “Sorry, you might be a nice guy, but we had to wield the axe somewhere”?
Which would you personally prefer if it was decided to merge your constituency with its neighbour, and you lost out? Choice (by Dave Cam) or luck?
Would you accept that some teachers and nurses in leafy Wokingham will have to go, on the grounds that a) mums in Wokingham help their kids with their homework, but mums in Hackney don’t, and b) residents of Wokingham lead healthy lives but people in Newcastle don’t?
The cuts will be profound, and profoundly change society. The political issue is about “fairness” (an impossible dream, as Tories know) and the desired shape of the post-disaster society. Are we ready to shed the comfort blanket and infantilisation imposed by the current government and the EU or not? If not, are we prepared to pay the extra costs?
You may with justice ask: what’d you do then, you unrepresentative know-all foaming mouthed nutter?
Well, here’s a suggestion.
Contrary to most bloggers, I found the devolution powers of our foreign policy to an obscure Scotch solicitor an interesting experiment. Not one I’d have first fired up the lab for, but…
Given that even foreign policy can be subcontracted and devolved, here are a few more government departments which have no right to be in Whitehall at all:
Education, Social Services, Welfare, Environment, Industry, Health, Police, Statistics, Tax raising. Ideally, these great departments of state should be exploded to the smallest possible degree, down to individual school, hospital and parish.
So there: The taxpayers’ alliance are wimps!
And believe me, doing it brutally and quickly is much kinder in the end than doing it considerately. Ask any psychotherapist / redundancy consultant.
You accused me in may last post of writing a mess. Maybe, but we react on blogs like that. I do assure you, dear Mr Redwood, that I’ve spent nearly 10 minutes writing this post.
Is it possible that Mandy will take over leadership from Brown before Xmas.
It certainly seems this way as all the other “ministers” have gone very quiet, and Mandy is on bbc every day.
So we could have a (spinner -ed) as PM?
Reply: No, I don’t think so.
Mike Stallard Reply:
September 14th, 2009 at 7:28 pm
Some people are saying that Gordon the Big Engine is only being kept on until the irish have ratified Lisbon. Lord Mandelson has, they say, used his European and Russian connections to make sure that Lisbon goes through.
As it happens we disagree with reputable Labour MP Paul Flynn’s anti-nuclear views. However in commenting on the latest Labour disgrace of former energy minister Hutton’s (job choice-ed) he comes to the same conclusion as we have previously blogged here and elsewhere…
“Ministers should be banned for life from working in companies that have received contracts from them in their ministerial incarnations.”
Paul Flynn’s blog appears below:
Today it is reported that Mr Hutton will be appointed to nuclear power company EDF’s Stakeholder Advisory Panel, which advises the firm’s senior management, and includes Lord Patten, the former Tory Cabinet Minister and last Governor of Hong Kong. It’s called the ‘revolving door. The Public Administration Committee (PASC) gave Richard Caborn and Lord Warner a roasting (see Quentin Letts’ hilarious account of the grilling)about taking vast sums in exchange for their ministerial contacts and ‘expertise.’ We pointed out in our report that Ministers settling contracts might have an eye on the possibility of a fat salary when they step down as ministers. We thought that there is a grave danger that contracts could be awarded for the wrong reasons. We made a major point of this peril in our report. My conviction is that ministers should be banned for life from working in companies that have received contracts from them in their ministerial incarnations. The contract that John Hutton bestowed of EDF was for £13 billion.
How do we manage the economy when our non-state banks are controlled from overseas, when much of our industry, most of our utilities, and a good deal else are foreign owned, and many of our government offices are owned by private equity firms in tax havens? Then there is the EU with its control over much else and especially agriculture. We are no longer the masters, we are the servants and the prisoners.
Frankly I’m almost surprised that James Naughtie wasted almost 15 minutes of his life this morning trying to get an answer out of Mandelson. As usual he treated both interviewer and listeners with his usual intellectual contempt, interrupting the interviewer, refusing to answer the questions, refusing to give way as he wandered off topic time & time again, and attacking the Tories whilst offering nothing of any substance at all as to what his own Government would do.
All we established this morning is that Mandelson is prepared to offer almost any placation or promise in the run up to the 2010 election whilst meticulously avoiding any actual commitments or detail or even a sense of urgency. It’s more “trust us despite our record” stuff from Labour again. With the economy in the state it’s in and the private sector bearing the entire impact of the credit crunch, this snake of a man talks in his cut glass accent of “not ruling anything out” but not until after the election. Yeah right pal – are we expected to be that stupid?
But therein lies the point. Labour is counting on the fact that there are enough people out there who are stupid enough to believe this drivel, or are so dependant on the state that they are voting to save thier free benefits or public sector jobs, or have ignorantly convinced themselves that the well of plenty is indeed bottomless and that debt repayments will not hurt, or that it can lumbered onto the “stinking rich”
Labour has failed to manage it’s affairs during the good times (if indeed they were genuinely good) and it’s response to economic failure is simply to take out more Credit Cards. Labour is the Kerry Katona of politics; no talent, no dignity, no skill and almost bankrupt.
The only thing that seems to be certain is that those at the heart of the New Labour project, be that Blair, Mandelson, the cabinet or the Grandees of the Union movement like Derek Simpson will have (looked afetr themselves-ed)whilst the rest of us are forced to face the wreckage they have created.
Mr Mandelson can really put a speech together, we listened to him on the car radio, we were on our way to way to pick up our spectacles , and we sat in the car park for a while until he had finished his speech.
If he were a working cocker spaniel , I would say his pedigree was impeccable- spanning a very good line over many generations. I would say that if he were in a field trial I would comment that he was a neat mover and VERY capable of producing the best in the line up. He has a good nose and a wonderful ability to sense and scent when to be patient and bide his time, but equally able of working the cover and showing style to the very best of his ability.
The very best of his ability and his style?
He is working for himself, and not even looking towards his master or responding to the whistle or hand signals for direction.
Like most dominant dogs, he is being pack leader- Now, I am not a bit happy with this situation.
Who on earth is in control, Mr Mandelson or Mr Brown.
Acorn Reply:
September 15th, 2009 at 7:02 am
True Belle, I think you have just defined the modern politician.
I think I know who the Sheep are in this tale; and the Sheepdogs; but, I am not sure who the Wolves are! Is Mandy a wolf?
http://www.aesopfables.com/cgi/aesop1.cgi?4&TheWolvesandtheSheepdogs
I read a headline today that Cameron / Osborne plan to privatise the state bank by selling us shares! Are they deranged. We ALREADY own the bloody things. By we I mean everyone in private business, not state employees (since they pay no tax) – or bank employees come to that. If they plan on doing this they should allocate to me shares to the value of whatever I have been coerced to spend on them, probably about £30,000.
Waramess Reply:
September 15th, 2009 at 7:39 am
Come come Lola; buying them off yourself for a multiple of what you originally paid for them will be great fun and this government will then tell you that you made a handsome profit on the transaction
It is time to use the left wing method of attacking the message carrier rather than the message. It is now clear that Mandie has already taken over and Brown cannot be trusted or bothered to address the nation. The message was total spin as was the radio4 interview with Gordie fan James Naughtie.
John,
We saw you on South Today this evening- just caught the end of your interview. Is it true that the meeting you attended should have had a better showing of fellow MPs?
Where were they all?
Reply:Most didn’t bother – see today’s blog
This country now has a structural deficit £100bn, or around 7% of GDP. To tackle it effectively will require a clear vision, a steely determination to turn things around and the leadership ability to carry a significant proportion of the public with them.
It will not be tackled by those who created this problem by running large deficit through the boom years. Neither will it be resolved by those who see reality in terms of political point-scoring to influence the next opinion polls. Nor by someone who cannot even utter the word “cut”.
The longer we leave this situation, the more likely it is that any government will be forced to cut indiscriminately to save the economy from collapse, on the instructions of the IMF.
[...] by John Redwood, Ian [...]
The Naughtie interview with Mandy on the Today programme was remeniscent of his infamous interview with Neil Kinnock – and as biased, as normal – how he keeps his job with bbc is a mystery.
As to Ireland, larger forces have returned to provide better guidance to the Irish than Sarkozy and the EC bureaucrats, and the tide will now turn.
It could turn much faster if the Irish people are presented with the option that to vote YES would ensure that Tony Blair becomes EU President.
The dire state of the public finances clearly necessitates public spending cuts, as even the most delusional peddler of the puerile ‘investment vs cuts’ line (the PM) has now acknowledged.
However, the timing, scale and nature of the cuts – and to what extent they need to be supplemented by revenue-raising measures (asset sales and/or tax rises) – are still highly debatable.
I personally believe that at least 80% of the fiscal repair work ought to be on the spending side, with up to 20% coming from higher revenues (not necessarily tax RATES – in fact in some cases where there is a realistic prospect of raising revenue by cutting rates this should be considered).
I also think the fiscal tightening pencilled-in by the government is likely to be insufficient, and is certainly imprudent given the scale of the problem.
In terms of the nature of the cuts, you’ve made some sensible suggestions but I do not think economies of one form or another (eg scrapping quangos, RDAs, SHAs etc) will be enough: bureaucracy has a habit of reappearing in new forms, and this empire-building will continue until the culture and incentives that foster it change. Previous attempts at realising efficiency savings from the centre have invariably had disappointing results.
Nor will programme cuts on easy targets like ID cards and Trident do much to reduce the government’s annual overdraft.
To be credible, politicians will have to grasp the nettle on issues like overhauling public sector pensions, the unnecessarily wide scope of tax credits and raising the retirement age across the board.
The question of the timing of the cuts is more problematic in my view. You can certainly argue that it is politically convenient and morally indefensible to defer the ‘pain’ until after the general election.
But it may just be economically justified given the continued fragility of the economy.
Whatever you think of the effectiveness of the recent ‘fiscal stimulus’ (which, let’s face it, was puny both by international standards and in comparison to the UK monetary stimulus), I’m not sure an aggressively pro-cyclical fiscal policy is the answer.
I still think the sensible approach is to aim for balanced budgets over an economic cycle, allowing for cyclical swings into surplus and deficit.
The big problem about Gordon Brown’s fiscal policy in 2001-08 was not that it was too Keynesian but that he ran big deficits while the economy was booming – ie it was pro-cyclical rather than counter-cyclical. The ‘automatic stabilisers’ were not working but were being subverted by excessive spending that was not covered by revenue (and much of the revenue that did come flooding in was fuelled by the overheated financial sector and housing market).
The problem with trying to correct the huge structural deficit while the economy is still on its knees is simply that it may well turn out to be counter-productive.
If lower public spending does not free up resources for the private sector, but simply depresses aggregate demand, the resulting higher unemployment will wreck the fiscal arithmetic as well as delaying the recovery.
I’m not saying this definitely will happen; there are other possible scenarios. But it is clearly a danger.
For that reason I would prefer a phasing-in of the cuts so that they become progressively larger as the economy recovers. This was the approach that was successfully adopted in 1993-95 (albeit with tax increases playing a bigger role that time).
Of course it is essential to keep the confidence of the markets. But the key to this is the credibility of the long-term fiscal strategy, not whether the cuts begin today or in 6 months’ time.
You claim: “History shows that in the past the Labour IMF cuts, the Conservative 1981 budget, and the Conservative strict controls on public spending in the late 1990s were all important parts of the recovery process. Far from preventing recovery, controlling the public budgets aided the recovery.”
I’m not convinced about the cause and effect here.
For starters, one key difference in 1975-76 and 1981 was the need to rein in runaway inflation as the precondition for any durable recovery. That clearly doesn’t apply this time, though inflation may re-emerge as a danger in future.
Secondly, the 1981 budget was a clever foil designed to facilitate lower interest rates and exchange rate without giving the markets the idea that the government was going soft on inflation. So while fiscal policy was tightened sharply, monetary policy was eased over the following years and a large devaluation in sterling fuelled the recovery in the mid-1980s. There is clearly little scope for a further monetary stimulus this time to offset a fiscal clawback.
The other point is that the means of fiscal tightening adopted in the 1981 budget was across-the-board direct and indirect tax increases – and indirect tax increases also played a big role in the 1993-97 fiscal consolidation. So, logically, if you believe fiscal policy at these times actually aided the recovery then you believe that tax increases, as well as spending cuts, can be introduced in the trough of a recession without fear of deepening it. I’m not so confident…
The reality is that in 1993-2000 (perhaps the most successful recent example of how to correct a deficit), the spending controls and tax rises were largely deferred until the recovery was clearly underway. The main reason the economy recovered in 1993-95 was not fiscal policy, but the lower interest rates and devaluation that followed our exit from the ERM.
Clearly, the corollary of my argument that it’s best to delay spending cuts is that they need to be ambitious and sustained once they take effect, and spending may well have to be reduced in cash terms (not just as a proportion of GDP) even when the economy is growing at trend or above-trend rates. I suspect British politicians will find that quite a challenge…