Welfare spending should fall but it’s no short-term budgetary cure

Andrew Lilico
THE effort to find a further £11.5bn in spending cuts for the 2015-16 financial year is approaching the home straight. Chancellor George Osborne has announced that seven Whitehall departments have agreed to cuts of between 8 and 10 per cent, that the ringfences on schools and the NHS will remain, and that welfare will not be cut any further. (Some headlines have it that international development spending is also protected, but that budget hasn’t been ringfenced, despite the rhetoric, and forward plans have been cut back more than once already since 2010.)

All this implies that a number of unprotected departments will, by the time the government’s programme is implemented in full, have experienced real terms cuts in excess of 30 per cent. It should be noted that these heavy cuts are falling precisely where spending did not rise under Gordon Brown. Conversely, precisely where Brown raised spending most – in health and education – budgets are protected.

Osborne says that the ringfences are “about choices of the kind of country we want to live in”. Indeed. It appears, these days, we have Conservative chancellors so that they can impose huge cuts to justice and police and defence, so as to keep doctors on £110,000 per year average salaries, pay whatever price big pharma asks for its medicines, and keep medical device company executives in the style to which they are accustomed. Just as, in a classic piece of corporatist capture, New Labour became enmeshed with the banking sector, so David Cameron and Osborne have chosen their corporatist allies in the medical industry.

The reason spending is too high is that it went up too much under Brown. The places it went up most were health and education. In the last Parliament (2009-10 versus 2004-5) spending on NHS England went up by 39 per cent in real terms. The UK economy was in real terms the same size in 2012 as it was in 2006. But between those years, NHS spending went up by more than 20 per cent in real terms, or around £20bn extra each year in today’s money – some 1.3 per cent of GDP. Such a huge reallocation of society’s resources is an important reason UK growth is so poor, because NHS spending is pathologically unproductive. That is not because health spending is intrinsically unproductive, but because as spending boomed and times were easy in the UK, public sector productivity growth has been poor to negative over the past 15 years. People say that “NHS inflation” is high. But that is to put the cart before the horse. Prices for things the NHS uses rose fast precisely because the budgets available to pay for them rose fast.

Why anyone should think it’s morally praiseworthy to restrict subsistence-level benefits to below-inflation rises while medical industry workers are kept in clover is beyond me. Mercifully, Osborne has said he’s not seeking yet further cuts to the welfare budget for 2015-6. The welfare budget does need to fall, but not by cutting benefits levels that are already very low in Britain by international standards. The problem with our benefits system is not that benefits are too high; it is that far too many people are eligible for benefits.

Having around 6m people living on out-of-work or income-related benefits – of an order of one fifth of the workforce – is absurd and shameful. Our welfare system lets people down, by trapping them in and giving up on them. We should certainly aspire to reduce the numbers on benefits. But these people have not come on to them overnight. This is a problem that has been building since at least the early 1980s, and materially reducing the number of people on benefits could take a decade. Thus, cutting the numbers on welfare is an important policy. But it’s not a short-term budgetary cure.

Osborne’s priorities have been to cut back on those forms of spending that the classical liberals on his own team most favour – spending on the protection of property rights and the promotion of virtue via the police, security and defence – so as to avoid making any cuts in those departments his political opponents regard as their own turf: health and schools. If that is a political necessity, perhaps one might disagree but understand. But Cameron and Osborne have said that it is because such spending is their priority too.

Perhaps there was some fat in the police budget. Perhaps defence procurement was inept, so cuts there might have been of value. But we clearly aren’t all in this together. The medical industry isn’t in it at all.

Andrew Lilico is a fellow of the Institute of Economic Affairs.