In its 1997 manifesto, Labour pledged that its Government would be made up of “wise spenders, not big spenders”. Has it kept the pledge? It doesn’t look like it. In the space of a decade, the Government will (adjusting for inflation) have increased public spending by £154bn a year. That’s an increase of 42%, according to Nick Herbert, director of the non-partisan think-tank Reform. In September, the public finances hit a record £10.8bn deficit. That’s a rise of £2.2bn on last year, something that surely reflects a level of big spending that should have us all worried.
Just like the Governor of the Bank of England, Mervyn King, already is. “I look up at the Chancellor’s window and see those famous golden scales which balance spending, on the one hand, and revenues, on the other. Recently they have tilted more and more towards the spending side,” he pointed out a few weeks ago.Taxes are on the upGordon Brown set himself what he called a ‘golden rule’ when he became Chancellor. The Government, he said, should borrow only to invest over the full course of an economic cycle. But given the level of spending going on at the moment, that rule looks more and more – as Edmund Conway puts it in The Daily Telegraph – like “a dead duck”. If Brown doesn’t cut spending or raise taxes sharpish, he’s going to break the rule. This puts him in a tricky situation. The trouble is, even without new tax rises, the tax burden is projected to rise sharply from here. Back in March, Tony Blair assured us that “taxes as a proportion of GDP under this Government have been lower than in most of the years Mrs Thatcher was Prime Minister”.
Technically that is true. The tax-take has been rising fast (since 1997 it is up from £297bn to £392bn), but GDP has been rising fast too, so as a percentage of GDP, taxes have remained relatively low. However, this won’t be the case for much longer: by 2008, the rising tax-take means that taxes as a proportion of GDP will be at their highest for nearly 25 years, claims Reform. Furthermore, the tax increases, they calculate, will reduce the rate of economic growth by up to 0.5% a year.
But where’s the value? “Any additional resources must be matched by reforms so that we get the best value for money,” said Gordon Brown back in November 2001. Unfortunately, almost no one thinks that that is what has happened. A recent poll by ICM Research reveals that 82% of us believe our taxes have gone up (the proportion of the tax burden borne by the individual has risen from 62.3% in 1997 to 73.5%), but that services hadn’t improved much and there is a lot of waste. Overall, 78% of people agree that our public services need to be reformed a great deal more than they need more cash. But reform doesn’t seem to be happening.
Consider the much-hyped cuts in public-sector jobs that the Government claims are coming. They’re not. Since 1998, total public-sector employment has risen 10% from 4.95 million to 5.45 million, and from here, as Reform points out, “for every one civil-service job cut, another four new public-sector employees will be recruited – just one of which will be a doctor, nurse, teacher or police officer”.
Appalling productivity
Worse, most of those new employees will be useless. It’s hard to measure public-sector productivity (see box, left), but it is clear from every study that’s been done that there is a huge productivity gap between the public and the private sectors. Indeed, The Business newspaper reports research from the Centre for Economics and Business Research that shows British workers employed in manufacturing are over three and a half times more productive than those employed in the public sector.
But public-sector productivity isn’t just bad. It’s actually falling, and has been for years. In July 2003, an initial study by the Office for National Statistics (ONS) found that the productivity of the public sector as a whole declined by 5% between 1998 and 2001. In April 2004, a report by the Treasury and Downing Street Strategy Unit, leaked to The Sunday Times, found that productivity in the public sector as a whole had fallen 10% since 1997. Zero productivity growth would be an improvement for the public sector.
That leaked report has also shown that productivity in public sector health and education fell by between 15% and 20% between 1997 and 2003, says Reform. According to the ONS, in each of the years 2001, 2002 and 2003, NHS output rose by 4%, even as nominal inputs to it rose 10%. That doesn’t look much like value for money to me.
A double whammy
This poor public-sector productivity performance can be put down to the fact that the public sector is labour intensive. So allocating more money to it without reforming the supply side can only mean falling productivity. This in turn risks a damaging ‘double-whammy’ effect on the economy, explains Graeme Leach, chief economist of the Institute of Directors. “On the one hand, the future tax burden is larger because of weak public-sector productivity growth and large increases in public spending. On the other, the future economy is smaller because of the negative effects of higher taxation.”
Tax, tax and more tax
So much then for “value for money”, “wise spending” and “reform”. By throwing resources at the public sector before working out how to make it work, the Government has pushed more and more of us into holding the same view as Ruth Lea, director of the Centre for Policy Studies and a tax adviser to the Tories. “All the money is going on staff, bureaucrats and pay and not on frontline services,” she says.
Meanwhile, surveys have shownthat we are already feeling the pain in our increased tax burden. This begs the question of how we will feel when Gordon Brown is forced to try andcut his Government’s nasty deficits after the next election. Then, as Oliver Letwin warns, “as surely as day follows night” there will be further tax rises. Best be ready.