The state is still growing – this isn’t the right kind of austerity

IF we want to identify a problem correctly, it is vital to get the facts right. The economy is doing poorly: the official statistics suggest it shrank by 0.3 per cent in the last three months of last year; even when one excludes the oil and gas sector, growth was feeble in 2012. We also know that the chancellor’s budget plans are in tatters, with the deficit going up again.

But there are lots of less well-known facts that demolish the increasingly mainstream explanation of our poor performance over the past few years, namely that “austerity has gone too far and too fast” or that monetary policy has been insufficiently loose and we now need quantitative easing (QE) to be expanded even further, perhaps to include other kinds of assets.

My first fact is that public spending as a share of GDP has gone up, not down, according to the OECD. Its latest estimate is that it increased from 48.6 per cent of GDP in 2011 to 49 per cent of GDP in 2012. The state is getting relatively bigger, not smaller, the very reverse of what was meant to happen. Of course, parts of the state are shrinking – infrastructure spending is much lower than it was (and the government has stupidly failed to allow the private sector to take on extra projects to compensate), councils are closing libraries, and there has been a much larger than expected reduction in the public sector workforce, down by another 128,000 between September 2011 and September 2012.

But overall government spending, bolstered by higher interest payments, an increase in spending on foreign aid and the fact that several departments have seen their spending protected has grown again relative to the overall output of the UK economy and thus relative to the private sector. We are seeing the wrong kind of austerity, focused on higher taxes rather than a genuine downsizing of the state, and a government that has horrendously failed to gain a grip on current spending.

If you need more convincing, consider my second fact. As everybody knows, there is meant to be a pay freeze in the public sector – and yet the average total pay for state employees increased by 2 per cent over the 12 months to November 2012 in nominal terms, which astonishingly is more than the 1.4 per cent in the private sector. There are partial mitigating factors. Perhaps the cuts to the state’s payroll are primarily happening by not recruiting entry-level people, who are paid less, reducing the average wage (but this ought to be partly compensated for by the retirement of more expensive staff). Lots of hard-working nurses and others in the public sector have genuinely seen no pay hikes, and are struggling.

But on average pay has gone up substantially in nominal terms in the public sector since the coalition came to power. People are being promoted or moved up career rungs to ensure they get a raise, bypassing instructions from the Treasury to freeze pay. Money that should have been saved has not been. This is symptomatic of the coalition’s lack of control.

My third fact is that real wages are collapsing, depressing consumer spending – inflation on the retail price index is 2.7 per cent and 3.1 per cent on the consumer price index. Private sector workers have on average seen the purchasing power of their pay slashed by up to 1.7 per cent over the past year alone. Again, this is the wrong kind of “austerity.”I’m all in favour of changing the Bank of England’s remit – but more inflation and even more depressed consumers is the last thing we need.

It is high time for more facts and less propaganda in the debate on Britain’s economic policy.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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