I first heard the term ‘Candour Deficit’ in a presentation by the Resolution Foundation’s chief economist, Matt Whittaker, shortly before the 2015 election. He was referring to the unwillingness of the main political parties to be honest with voters about the choices the country faces on tax and public spending. He was on the case again last week with a succinct yet comprehensive report Ending austerity?
As Matt’s charts show, the argument that there hasn’t been any austerity falls apart as soon as you look at the detail. It is true that overall public spending fell only slightly after 2010 and will be above its 2010 level by the end of the decade. But the population is rising so, in per capita terms, we are looking at a real terms fall of 3.9 percent.
That might not sound a lot but the balance of public spending is shifting. Public service spending, known in government speak as Departmental Expenditure Limits (DEL), is falling relative to Annually Managed Expenditure (AME) which is made up of less predictable spending elements like social security and debt interest. If overall public spending is flat but AME rises then DEL has to fall.
The DEL figure includes both investment and the cost of the day-to-day running of public services. If the government decides to increase investment, then the amount left for day-to-day public services falls even further. Per person, it will be around four fifths of what it was in 2010.
But once you protect health spending, which is huge and overseas aid spending, which is tiny, all other services are left competing for a shrinking pot.
As a result, there have already been significant cuts and staff reductions in many areas.
This, then, is how what looks like a fairly modest cut in public spending turns into some major cuts to the provision of day-to-day public services. Because of the continuing upward pressure on public spending, a small overall budget reduction is magnified by the time it reaches the frontline departments.
Still, this is all a far cry from when George Osborne was in his pomp and we were talking about cuts to per capita RDEL of 27.5 percent by 2018-19 or, that December when he went really bonkers, 31 percent. But what looks like an easing of austerity is simply the effect of the government giving itself several years longer to eliminate the deficit. It is now looking at sometime in the middle of the next decade.
Even then, I wonder if it will really happen. I’m doubtful for a number of reasons.
Firstly, the economic outlook has deteriorated. Last week, the OBR warned that Brexit presents a significant risk to public finances. It downgraded its economic forecast after the Brexit vote and then downgraded it again in March. It sees lower than expected growth dragging on, along with trade negotiations, into the 2020s. Might even this might be optimistic, given that we seem to be discovering new Brexit pitfalls by the week? Any shortfall in expected growth will hit tax revenues and increase the gap between government income and spending, which is what happened for much of the last seven years.
Secondly, I wonder whether the government will see the proposed welfare cuts through. As Matt shows, the cuts will fall primarily on those of working age; over 11 million families.
Some of the cuts have yet to be implemented. Those on already low incomes, many of whom are in work, will continue to see their benefits fall each month for the rest of the decade.
The OBR thinks this is a tall order too:
The cumulative scale of these cuts is unprecedented and, on current policy, real per capita welfare cap spending in 2021-22 is projected to be around 10 per cent lower than its 2015-16 level. Roughly half the projected savings come from simple changes to uprating – for example, the four-year uprating freeze from 2016-17 to 2019-20 – while the other half relies on the successful operational delivery of more complex changes to the welfare system. These include structural changes to the delivery of incapacity benefits, disability benefits, housing benefit, and universal credit (UC).
Furthermore, it says, the universal credit rollout isn’t going too well either:
[A]round half the welfare cuts over the five years to 2020 come from more complex reforms. The largest of these are cuts to UC work allowances and payments to larger families, which are taking place while a number of reforms remain unfinished. This type of reform has proven difficult to deliver and is often associated with substantial forecast revisions. Initial forecasts for spending on tax credits, employment support allowance (ESA) and PIP have all been too low. And while the level of savings has tended to disappoint, we have also seen delays in their delivery.
The universal credit rollout in Kensington was halted after the Grenfell fire. Piling an additional burden onto already distressed claimants was deemed too great a risk. As the economy slows, and wages stay flat, might a risk assessment conclude that continued social security cuts pose a threat to social order? When George Osborne proposed cuts to tax credits the outcry forced the government to drop the plan. There is no reason to suppose that the reaction to working-age welfare cuts will be any less vocal as the decade wears on. Given the mood of the country at the moment the opposition may be even stronger. The last thing a government mired in Brexit negotiations wants is angry demonstrations and disorder. I wonder whether the welfare cuts might be modified or even quietly dumped.
But without savings to the social security budget, public services would have to take an even greater share of the spending cuts. Which brings me to the third point. Public service providers have already cut all the easy stuff, or the things that people can’t see, like regulatory and support services. The next round of cuts is likely to fall on far more visible areas, like roads, parks and rubbish collection. It’s not just some whinging lefties who are saying this. Earlier this month the Conservative chairman of the Local Government Association warned that councils would be unable to deliver core services by the end of the decade. The NHS, too, is facing rising financial pressure. People are starting to notice and public opinion on tax and spending is shifting. When public opinion shifts, MPs tend to shift too. Even the projected cuts to public service spending, though way short of those planned by George Osborne, may well be enough to push some parts of the public sector over the edge, along with some weary and angry voters.
And finally, over the medium term, pressure on the public finances, primarily from health and social care spending, isn’t going to let up. Health costs run ahead of inflation in any case and with an ageing population, per capita spending will inevitably rise. Projections vary considerably depending on the assumptions made (see previous post) but in all the OBR’s scenarios, spending grows faster than the economy.
All of which makes me wonder whether it’s actually possible to reduce the deficit much further through spending cuts, even over the less ambitious timescale adopted since the departure of George Osborne. Unless people are prepared to accept much lower levels of state provision, and there is little to suggest that they are, cutting public service spending by the amounts suggested by the government is going to be difficult. Sometime before the end of this decade, we may get to the point where a majority of people decide they have had enough.
The question then is what do you do next? The Resolution Foundation calculates that stopping the cuts to public service and welfare spending from next financial year would cost over £30 billion. That either means more borrowing or more taxes. And just taxing ‘the rich’ won’t solve the problem.
Matt’s report concludes:
Because ‘ending’ austerity comes with large price tags, further major taxes rises are difficult and the Chancellor has ruled out significant extra borrowing, we are set for a debate requiring prioritisation of what spending restraints can be eased.
To put it another way it’s time we had an adult debate not just about what taxes need to rise but what ‘ending austerity’ actually means.
Back to that Candour Deficit again. Which is where we came in.