Why we shouldn't get excited about a deficit reduction of £300m

Today's public sector borrowing figures make for grim reading, but chancellor George Osborne may be happy to see that the deficit has narrowed. This March saw a deficit of £120.6bn, £300m smaller than the same month last year. To many, £300m may seem a large sum, but it is worth putting in perspective. Government spending in 2011-2012 totalled £694.9bn:

(Source: Guardian)

A saving of £300m is a piffling 0.04 per cent of what was spent in just one year. The Department for Culture, Media & Sport, often cited as an example of a government department that could easily be scrapped with minimal reshuffling of some roles only accounts for £6.7bn, less than one per cent of total expenditure.

It appears that after accounting for the reclassifications of Northern Rock and Bradford & Bingley assets the deficit is actually £400m higher than last year. However you look at the numbers, government attempts to get the books in order are embarrassing. The task is not an easy one, as the large items (health, welfare, pensions, education, and defence) can not easily be tackled. Reducing spending in these areas would require reform to these services.

That is not to say that reform would not be desirable - many of these sectors are sorely lacking in competition as a result of ever increasing centralisation of powers - but the returns from such an approach would be gradual. If we can not begin to get to grips with them now then an anticipated rise in debt interest payments could dwarf any future growth, propelling debt to GDP ratios higher.

The areas that the coalition has decided to ringfence are expected to grow as a share of spending, and Dr Patrick Nolan argues that ringfencing is ill-advised:

Cuts have fallen on departments on political grounds, rather than to improve value for money. And areas like health haven’t benefited from the pressure to change and innovate, in the way that other services like policing are already showing.

Ring-fencing has also been a political own goal. As former New Zealand finance minister Sir Roger Douglas noted, it is harder to make the political case for reform when budgets are protected. Quite simply, running the value for money ruler over all spending means it is harder for ministers to complain when budgets get cut.

The result has been to create a perception of underfunding, while leaving the real drivers of spending unaddressed. In 2010, when the Comprehensive Spending Review was launched, a Treasury spokesman said: “Anyone who thinks the review is just about saving money is missing the point. This is a once-in-a-generation opportunity to transform the way that government works.” Yet by protecting the largest spending areas, the coalition has failed to achieve this vision.

(Full article)