Yesterday’s Comprehensive Spending Review will have been well analysed by all the papers and commentators with lots of questions about whether the cuts are “fair” or not and if they are necessary at all.
What was more interesting to me (or dismaying) as an economist (but very much lapsed one) was the extent the political aspects decided the economic decisions. This is never unusual but given the unique financial situation interesting.
I won’t touch on if the cuts are necessary or not except to say that as Labour were overspending when the economy was in a boom, therefore not saving for a rainy day, when the recession struck our borrowing rocketed and we ended up with the worst structural deficit of the G20, and gave us less room to carry out some of the fiscal expansionary policies of other countries such as Germany and France.
So on the political aspect, the key was the Prime Minister was determined to stick to as much of his electoral promise as possible, this makes sense politically to ensure manifesto promises were being kept. However, this causes a few economic problems:
- NHS, one of the largest government spenders, was ringfenced
- This meant other departments cuts had to be increased
- Universal benefits were not looked at
- I really felt, as Vince Cable said, that everything must be reviewed (this was in relation to tuition fees) then the idea of the well off receiving Winter Fuel Allowance, free TV licences, free bus passes and even a state pension to be absurd. However, the grey vote are more likely to vote and have strong lobbying powers so this was always a dangerous territory
- Income tax would not increase, under any party
- One way to fill to ensure spending could be protected, but seen as deeply unpopular, even though it could pay for Higher Education and protect some of the social housing
- Due to the above welfare was targeted, which although needs to be reviewed, was taken further than expected
- The child benefit political hit was in exchange for the Liberal Democrats hit on tuition fees, even though tuition fees was much more symbolic to the Liberal Democrats than child benefit to the Conservatives
So what did I make of it?
Well I really felt the Conservative need to protect the NHS and universal benefits restricted the options available. I would have:
- Ringfenced no department except International Development (peanuts in the grand scheme of things)
- Scrapped universal benefits for well off pensioners
- Put a little bit more money into capital investment projects
- Ensured a coherent plan on housing, both private and social, as the new proposals are clever in encouraging more housing associations to build property at commercially viable rates, there is no proposal to ensure enough housing does get built. One of the key problems of the past 30 years.
- Probably would not have brought forward the rise in pension age for everyone to 2020, fundamentally wrong for women in their 50s.
I was a little surprised that more was not made of the fact:
- Total government expenditure is still rising to 2014/5
- The rate of growth is declining
- Total public sector expenditure as a % of GDP will be at the same level as 2006/7.
The problem with all the above points is the NHS is growing in real terms so everyone else gets less of the pie. What I can’t work out now is how we’ll get enough money to increase the income tax threshold again, although it is in the coalition agreement so should happen.