There’s one economic policy the coalition has yet to try: Spend less to boost growth

Tim Morgan
TODAY’S sound and fury around the chancellor’s autumn statement hides a remarkable consensus shared by government and opposition alike. Public spending needs to be cut, but not by very much. Increases in tax rates are a regrettable necessity, and any idea of actually cutting the tax burden on working people is out of the question. Britain’s fiscal deficit may be unsustainable, but growth will fix that.

If this consensus tells us anything at all, it is that politicians are living in a different and a better world. For those of us living in the real one, however, there are some uncomfortable questions that need to be asked.

For a start, where is growth supposed to come from? Real estate, construction and financial services – that’s 40 per cent of the economy, by the way – have luxuriated on the back of massive increases in individual indebtedness. Another 19 per cent – health, education and public administration – have prospered from the Brown binge in public spending. Add in retailers – for whom the outlook is rendered grim by falling disposable incomes – and you have 70 per cent of the economy that cannot grow now that private borrowing, and growth in public spending, are dead-letters.

Then look at where working people are right now. Wages in the private and public sectors increased by just 4.4 per cent and 8.8 per cent, respectively, between 2007 and 2010, while the costs of essentials have increased inexorably (gas +27 per cent, electricity +15 per cent, water +13 per cent, petrol +22 per cent and food +19 per cent). Unemployment, meanwhile, is rising sharply, particularly among young people.

What policymakers don’t want you to know is that they’ve tried almost everything, without success. As savers know to their cost, we’ve had near-zero interest rates for the best part of three years. The value of sterling has crumbled. Governments have borrowed and spent £390bn and counting, and the Bank of England has printed £275bn out of thin air. Yet still the economy refuses to respond.

But there is one policy – whisper it who dares – that hasn’t been tried, despite a pretty good historic track-record. That policy is to cut spending, and hand money back to working people. At Tullett Prebon, we believe that government should cut taxes by £50bn.

Government will tell you, of course, that this isn’t possible. This is an argument that should be subjected to the most rigorous challenge.

In real terms, government spending increased by 53 per cent between 1999-2000 (£451bn at today’s prices) and 2009-10 (£688bn). Has every single £1 of extra taxpayer spending produced a corresponding improvement in public services? Why must government spend £688bn today, when it seemed to get along just fine spending £451bn ten years ago? For that matter, why has the health service recruited 77 per cent more managers over the last decade, but only 23 per cent more nurses? And how is it that the Ministry of Defence can employ more civilians than sailors or airmen combined, but cannot afford a single aircraft carrier?

The reality is that public service productivity has declined alarmingly, but that’s not the fault of the front-line workforce. Most of the waste has actually occurred in costly outsourcing and, as Sir Philip Green has demonstrated, in absurdly wasteful procurement practices.

For two decades, governments of both hues have been busy dismantling the previous centralised public service structure, fragmenting services into small units which replicate functions and (no surprise here) all require highly-paid management teams. All of this has been done in the pursuit of the chimeras of spurious competition and illusory user choice. The fragmentation of public services has been such a shambles that Labour tried to fix it by imposing a costly and counter-productive target culture.

The real answers are simpler, and involve abandoning fragmentation of the public services. In the NHS, for example, re-centralise functions, terminate wasteful outsourcing, scrap the costly Trust system, and put the management of hospitals back into the hands of doctors and matrons.

Although we have called for £50bn of tax cuts, we’ve calculated that government actually can reduce spending by £70bn, putting £20bn of that into a programme of building homes for rent, and into direct (not PFI) investment in hospitals, schools and infrastructure. Much of the saving can be achieved from reconsolidating public services, and the rest from eliminating the luxury of “middle class benefits” while tightening the eligibility criteria such that benefits are paid only to those in genuine need.

The aggregate of public, corporate and individual debt is far higher here than in Greece, Italy or Spain. This debt can be supported only if the economy grows, which manifestly it cannot as currently configured. The way to deliver growth is to reduce the tax burden on the small and medium enterprises (SME) which can alone create jobs, and to hand money back to working people, who stand in real need of help.

Dr Tim Morgan is the global head of research for Tullett Prebon.