Cutting spending through the ages

 
Allister Heath
BEWARE, dear reader: this is a trick question. Which Chancellor of the Exchequer cut spending the most in a single year? Was it George Osborne in his Budget last week, which if this weekend’s protesters are to be believed is pushing through the most “reckless” reductions imaginable? Or was it the great Tory chancellor Nigel Lawson at the height of Margaret Thatcher’s premiership in the 1980s, the Tories’ Ken Clarke in the 1990s or even the 1970s socialist stalwart Dennis Healey?

Courtesy of the Office for Budget Responsibility, which has released all of the data, adjusted for inflation, we can finally calculate the answers. Lawson cut by 2.6 per cent in 1988-89, at the height of his very own inflationary bubble; but the reductions were painless as they were caused by a slump in unemployment benefits. He cut in more difficult circumstances by 1.4 per cent in 1985-86. Spending grew slightly in the following two years – but expenditure over the four-year period fell by 3.1 per cent. Spending only returned to the levels of 1984-85 in 1990-91 – and remained lower as a share of GDP.

Remarkably, Labour’s Healey was the joint second biggest one-year cutter: he slashed total public spending by 2.2 per cent in real terms in 1977-78, after a bankrupt UK was forced to take orders from the IMF. This was almost exactly the same as the 2.2 per cent chopped by Clarke in 1996-97 –though Gordon Brown stuck to his Tory predecessor’s spending plans and went on to cut another 0.5 per cent or so in 1997-98, taking the total two-year reduction to 2.7 per cent.

And what of Osborne? He will be cutting by just 0.6 per cent in 2011-12 (barely any more than Brown managed, and less in cash terms than Healey), followed by 1.1 per cent in 2012-13, 1.3 per cent in 2013-14 and 0.8 per cent in 2014-15. Overall, spending will be reduced by 3.7 per cent. The reason these figures are lower than the ones usually cited is that they take all spending into account – not just a few selected departments. So Osborne’s one year-cuts are modest compared with those of his predecessors – but his reductions are spread over four years and go slightly further than any Chancellor has achieved in the past 40 years. It might have been better politically as well as economically for Osborne to spread the cuts over just two years, and not to backload them in the way he has done.

The worrying reality is that Osborne’s austerity package is the minimum required to stabilise the public finances. The most likely Plan B would be more tax hikes and more cuts. There is simply no way that global investors would accept huge increases in spending, Keynesian-style, in the current climate – and any boost to demand from a slight reduction in cuts (as advocated by the more realistic Labour opponents of the Chancellor) would probably be cancelled out by higher rates. The OBR calculates that every percentage point rise in gilt rates would cost the taxpayer another £5bn in 2015-16. Debt interest spending in the first ten months of the year was up 48 per cent.

Revenues are also uncertain. The OBR is predicting a 10 per cent fall in the cash value of City bonuses in 2010-11, compared with a previous assumption of 5 per cent growth. This will cut tax receipts by £1bn a year, as the war on the City backfires. One thing is certain: smashing up a few bank branches and shops will resolve nothing.

allister.heath@cityam.com

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