Philip Hammond MP: This period of economic certainty would be the wrong time to cut the growth of public spending

ConservativeHome has launched a campaign to encourage the Conservative Party to reduce the growth in public spending.  Yesterday we published a poll of members that showed overwhelming support for that campaign.  In this Platform piece Philip Hammond MP, Shadow Chief Secretary to the Treasury, explains why the Tories have decided to match Labour's spending plans until 2010/11.

More than two years ago David Cameron and George Osborne said that a Conservative Government would share the proceeds of growth between the funding our public services need and the competitive lower taxes our economy demands. This means that over an economic cycle the economy will grow faster than the government, and government spending will fall as a percentage of GDP. Pursuing this approach over an economic cycle creates the headroom for sustainably lower taxes. And let no one be in any doubt that we are a party that believes in lower taxes.

After 10 years of unsustainable increases in public spending, the Labour Government has now been forced by the state of the public finances to adopt exactly this policy for the three years until 2010-11. Where we stand through principle, they have been forced by necessity. Last September George Osborne confirmed that a Conservative Government would adopt these spending totals, and that, like Labour, we would review the final year’s total in a spending review in 2009.

These spending plans imply that spending will fall as a percentage of GDP over the next three years, with a real terms growth rate for public spending of 2.1%, well below the 2.75% trend growth rate of the economy. To place this growth rate in context, it is half the average 4.0% growth rate of public spending under Labour’s spending reviews to date, and the same as the 2.1% growth rate of public spending during the first Thatcher Government from 1979 to 1983.

Gordon Brown’s economic incompetence has failed to prepare us for this period of economic uncertainty by leaving us with the largest budget deficit in Europe. As a result, one of the key challenges facing a new Conservative Government will be to restore the public finances to health. By continuing to ensure that the economy grows faster than the government over an economic cycle this is exactly what we will be able to achieve. Research by the OECD has found that explicit expenditure targets, such as our policy of sharing the proceeds of growth, have been a crucial feature of successful fiscal consolidations around the world.

Some people have argued on this site that if economic growth falls below 2.1% we will no longer be able to keep the growth of spending below the growth rate of the economy. Our policy of sharing the proceeds of growth is defined over the economic cycle in order to address precisely this possibility. Over the course of an economic cycle a period of below trend growth is, by definition, followed by a period of above trend growth. History shows that public spending tends to rise during economic slowdowns as a result of higher benefit spending. For example, spending grew by 5.3% in real terms during 1991-92 and by 4.4% the following year. Similarly, spending tends to slow during economic upturns as benefit spending falls.

A period of economic uncertainty, such as we are now experiencing, would be exactly the wrong time to raise taxes or cut the growth rate of spending. Instead, by continuing to share the proceeds of growth over the economic cycle we will be able gradually to restore the public finances to health without the need for badly timed spending cuts or tax increases that would risk destabilising the economy at a moment of vulnerability.

Today, we have won a reputation for economic competence for the first time in a decade and a half. That is due to our commitment to economic and fiscal stability. Our hard won credibility as a party would be put at risk if we were to lose our collective nerve and flip-flop on public spending policy at this critical moment.

Comments

[Yet Another Anon]

History shows that public spending tends to rise during economic slowdowns as a result of higher benefit spending. For example, spending grew by 5.3% in real terms during 1991-92 and by 4.4% the following year. Similarly, spending tends to slow during economic upturns as benefit spending falls.
That does depend what is done with benefit spending, radical restructuring simplifying the system and making cuts in the benefits of single people and switching some things such as Housing Benefit, Council Tax Benefit, Prescription Exemptions to Low Interest Loans repayable in the same way as Student Loans could save a lot of money. Scraping things such as Budgeting Loans and many other payments under the Social Fund, scrapping paying National Insurance Contributions on behalf of people on benefits could all save money. The National Government in 1931 introduced real terms cuts introduced at very short notice in many benefit rates, so did the New Zealand government in 1996.

The recession of the early 1990s was not merely a slowdown,but actually a fairly severe global recession - even so though it was far less severe than that of the 1930s.

[Tony Makara]

Mr Hammond needs to understand that the British economy has been artificially propped up by debt-fueled spending and an overvalued currency to mask inflation. Economic policy now needs to shift the emphasis away from inflationary demand-led growth and instead, with an economic downturn coming, the emphasis must be placed on kick-starting the economy by supporting the supply-side and cutting taxes for business. A way to provide the revenue to support business is to prune the public sector which has grown to an obscene size under the Labour government.

[Alex Swanson]

A period of economic uncertainty, such as we are now experiencing, would be exactly the wrong time to raise taxes or cut the growth rate of spending.

So how are you going to keep increasing spending without raising taxes? Unless you are confusing "raising taxes" with "raising tax rates" - but surely a Conservative Party economic spokesman would never confuse the two?

And why shouldn't you cut the growth rate of spending? Are you seriously suggesting that there is nothing the govt currently does - nothing at all - which could not be dispensed with or simplified so that it costs less?

Instead, by continuing to share the proceeds of growth over the economic cycle we will be able gradually to restore the public finances to health without the need for badly timed spending cuts or tax increases that would risk destabilising the economy at a moment of vulnerability.

Spoken like s true statist. What about the financial health and stability of the people who are being bled to support this leviathan?

Today, we have won a reputation for economic competence for the first time in a decade and a half.

No you haven't. It's just that people think Labour is worse. That's not an endorsement.

Our hard won credibility as a party would be put at risk if we were to lose our collective nerve and flip-flop on public spending policy at this critical moment.

You have no credibility - what makes you think otherwise? - and slavishly following Labour is itself a failure of nerve.

[deborah]

Oh dear.

[johnC]

'For example, spending grew by 5.3% in real terms during 1991-92 and by 4.4% the following year.'

This was as much to do with John Major's decision to award above inflation pay rises to public sector workers such as nurses as the effects of the recession. We took the lid off public spending, raised taxes, and lost our reputation for economic competence. We don't want to repeat the mistakes of the early 1990's Mr Hammond.

[Tony Makara]

The public sector has to be evaluated by what it produces as an end-product, that is in terms of its value to the public. How much of the public sector actually serves an end? How much of the public sector just exists to empower government?

[Iain]

Well I think they could cut spending, like cut the billions we are giving to the EU, Labour having voted to send more of our tax money there. Cut the £825 million we are giving India in Aid, (can anybody explain why were are giving a country which can afford to fund a nuclear arms program aid money?) So for a start there's £5 billion we are giving the EU, another £10 billion we are wasting in Aid money, let alone all the £10's of billions the British state is wasting.

So there's a kings ransom which can be cut from spending which wouldn’t have any effect on services, but all it takes is the desire to cut the bloated British state. Unfortunately with Osborne buying into the tax and spend policies of Labour the Conservatives have lost the desire to hunt out the waste, make the state more efficient and cut back the state to doing jobs it can do without messing up.

[David Cooper]

Tony @ 9.42: "How much of the public sector just exists to empower government?"

Or to employ the otherwise unemployable, often at grossly excessive salaries?

[David Belchamber]

Most people above have pointed out the difference between necessary and totally unnecessary expenditure and it is worrying that the tories do not commit unequivocally to rooting out those aspects of this government that just waste taxpayers' money.
I won't go through the list again.

The second thing that the tories should do is to stress that management by targets was seen to fail in the NHS and elsewhere years ago. Why not talk about more competent management of all these huge government departments, the Home Office, Defra, the NHS, Education etc that consume billions a year without achieving the real objectives?

Competent management would save us a lot of money without reducing the quality of services; indeed it would probably improve them.

"More bang for our buck" as the good Oliver Letwin used to proclaim when he was allowed to talk to the electorate!

[Concerned Taxpayer]

Mr Hammond should see some of the work done by the superb TaxPayers' Alliance, perhaps then he'll see we can achieve cuts in spending whilst maintaining frontline services.

Their recent reports expose the growth of self-congratulatory publicity in local government(http://tpa.typepad.com/home/files/council_spending_uncovered_1_publicity.pdf)and the increasing size of bureaucratic middle management (http://tpa.typepad.com/home/files/council_spending_uncovered_2_middle_management_pay.pdf). I'm sure this is just the tip of the iceberg and shows savings can be made. Just be bold Mr Cameron!

[Ian Parker]

I think we’re all aware that government, as broadly defined, has grown massively over the past ten years. Bureaucracy and regulation are now dominant features of the UK. Both undermine competitiveness, even before you look at the disincentives to enterprise and families built into the specific tax code.

I had hoped that a sensible Conservative objective would be genuinely to become the party of small government. As opposed to the current doctrine of centralisation and seeking to manage everything, a government’s legitimate role should be to provide services, defined in scope, with the maximum possible efficiency in terms of delivery and cost. We have seen under New Labour that there is, in any case, little correlation between expenditure and delivery.

The author mentions that the Tories are naturally the party of lower taxes. This is not apparent from Cameron and Osborne who have been very weak in this area. Despite the bloated bureaucracy, they can apparently see very little scope for cutting back government.

As for the observation, “Today, we have won a reputation for economic competence for the first time in a decade and a half”, I assume you must be talking in relative terms, reflecting the fact that Labour have lost all credibility as their mirage becomes more of a reality. To follow up with, “That is due to our commitment to economic and fiscal stability. Our hard won credibility as a party would be put at risk if we were to lose our collective nerve and flip-flop on public spending policy at this critical moment” simply calls into question the validity of the former.

[HF]

I hope that the only reason Hammond says this is because we cannot win an election promising cuts because the voters will not support us.

Instead we have to rely on the Taxpayers Alliance to change public opinion and their record is unfortunately very patchy.

[Malcolm Dunn]

I would agree with that HF. No opposition ever cut spending or taxes we need to win. I don't think many posters here seem to appreciate that there will be quite a lot of pain for Brown by just adhering to a 2%p.a. spending increase. Also whilst it is true that giving India £825,000,000 is not the best use of taxpayers money and should be cut as is the money we waste giving to the EU this is small beer compared with the money needed by our armed forces,the police and a responsible prison building programme.

[Bexie]

Some credible commentator (I am usure whom memory fades...) described Britain as being one of the most unfriendly places to do business. This is not because of tax, but because of excessive regulation of businesses that make it actually reckless (according to my accountant) to start a small business here.

What we should be concentrating our gaze on is the Leviathan that is state, not on the services it has chosen to effectively nationalise. Were the individual Hospitals, shcools and state aid bodies independent and just happening to be owned by the state it could work better than it does now.

What is both destructive, and expensive, is the layers of administration, target setting, target monitoring and my favorite the "political charity" that is a charity that is dependent on state funding to operate. We should remove charitable status from all of them, as well as their state funding.

Frankly I would hold a convention for the lot of these folks on the Goodwin sands and run off with the boat.

[Yogi]

Tony Makara has put it very eloquently the problem with our economy. The state is too big now, with all the H&S and other non-job posts. If we see the Government share of the GDP now, it is as high as that in the mid eighties, when the Coal, Steel and teh utilities were all in state ownership.

We must also recognise that the Government cannot create jobs - but we must seriously look at the skill gap and we have fallen behind faster than even the US. This is thanks to the burgeoning soft degree courses taking valuable funds away from proper science and engineering courses as well as other vocational training programmes.

In the 1990s at least we had a current account surplus, but that is also gone now. What we need is for the Pound to fall by at least 20% against the major currencies - true it will create short term inflation but reduce our dependency on import of consumer goods. I would go further by reducing teh minimum wage for unskileld workers and try and reduce the number of quangos by at least half.

I can hear the metropolitan chatterring classes sniping - but the country as a whole neds a lesson in belt tightening.

[Lindsay Jenkins]

Someone not familiar with Britain and British politics might be forgiven for thinking that Philip Hammond is a socialist.

While agreeing with nearly all the comments posted above, the one Hammond remark which takes the biscuit is this: 'And let no one be in any doubt that we are a party that believes in lower taxes.'

Really?

[Matthew Sinclair]

"A period of economic uncertainty, such as we are now experiencing, would be exactly the wrong time to raise taxes or cut the growth rate of spending."

Nothing in this article appears to offer the slightest support for the – surely crucial – statement that times of uncertainty are the wrong time to cut growth in spending. After all, worries about poor fiscal discipline - spending more than you have - are a really poor reason to spend more.

Equally, the logic that growth above and below trend will balance out over the cycle is fine in theory but does not address the question of what a Conservative government would do if not getting the growth they expected - either in a single year or over the cycle - spend less, tax more or take on more debt?

Comparisons to Thatcher are misleading. The scale of the economic collapse in 1979 was far beyond anything happening at the moment with the credit crunch. There is no surge in benefit spending either going on right now or projected over the next few years (see here: http://www.dwp.gov.uk/asd/asd4/Table2.xls). There is just low economic growth and a fine way of remedying that situation would be to cut the size of Government.

[Bexie]

"Thomas Jefferson, whom Democrats claim as their party's founder said: "I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."

from today's Washington Times

[Editor]

Fraser Nelson has read Philip Hammond's piece and would like more imagination as to how the Tories will divide up the spending settlement.

Iain Martin accuses Mr Hammond of setting up straw men to knock them down: "Those urging bolder action are not advocating wild schemes which involve slashing and burning the public sector."

Corin Taylor of the TaxPayers' Alliance lists four reasons why Mr Hammond is wrong.

[Richard Calhoun]

SAME OLD ARGUMENTS, SAME OLD WE KNOW BEST HOW TO SPEND YOUR MONEY:

Lets have some imagination, obviously the more we are taxed the less we are able to spend in the marketplace.

Cut spending, cut taxes and give the money back to the taxpayer, he/she knows best.

There is huge scope for tax cuts and if the Tories aren't prepared to tackle this one they will not win a satisfactory working majority in 2009/10

Be bold and you will be rewarded, otherwise you will condemn this country to a low growth economy.

[Richard Calhoun]

ANOTHER THING!!

WHERE ARE THE FLAT TAX PROPOSALS THAT YOU WERE TEMPTING US WITH 2 YEARS AGO??

If you have not the wit or the imagination to offer the electorate a market based, low tax economy why should they change from Labour.

Its not the committed Tory party member you have to convince but the new labour voters who will not come accross if you do not have some radical economic policies.

[Tony Makara]

The way to look at this is simple. If we believe Labour are taxing us too much then why aren't we promised tax cuts? If we believe the public sector is wasteful then why are we going to continue with the waste? Now, I want to see the party elected into government, so I can understand the caution, but if we are right on the issues of tax and the public sector waste we should put our case before the people. Especially now that economy is clearly heading into a downturn. Making savings in the public sector should be presented for the good housekeeping that it is.

[Tony Makara]

ITV TONIGHT 10:35pm a programme called 'Repossession, repossession, repossesion'. It looks like an interesting expose of Gordon Brown's credit culture and the problems it has caused with personal debt.

[David Belchamber]

Tony at 17.46 and 17.53:

"ITV TONIGHT 10:35pm a programme called 'Repossession, repossession, repossesion'. It looks like an interesting expose of Gordon Brown's credit culture and the problems it has caused with personal debt".

This is Jeff Randall, isn't it? He is the chap the tories need to instil some commonsense into their economic policies.

I understand and sympathise with the predicament in which the tories find themselves whenever they talk about reducing taxes. The hysterical Ed Balls, Alistair Darling et al cry: "Tory tax cuts mean slashing public services", so the tories would be foolish to be too specific at this stage.

However, surely the initial emphasis must be on deregulation, better, more focused management and and an attack on sheer waste.

I am not going to vote for another party that is simply promising to waste as high a proportion of my taxes as Nulab does.

[Tony Makara]

David Belchamber, it sounds like the programme is going to make bad press for Brown's so-called miracle economy. This is from the ITV website.

"During the past decade, Britain has grown accustomed to living the high life on debt. Now, as home repossessions and bankruptcies soar, business journalist Jeff Randall investigates how and why the nation got hooked on spending money it doesn't have - and concludes that people are about to wake up to the painful realisation that all debts eventually have to be paid"

The last line is particularly interesting, and it applies to governments who borrow too, except that it will be the hard-working taxpayer who foots the governments bill.

[David Sergeant]

The first job of a Tory government will be to sort out the mess of the public services. (I never understood why more was not made of the collapse of Britain's relative world educational position.) In the short term it will cost, even if only in redundancy payments. It should also mean that the services start giving value for money. At this stage (note) talking of cuts may fit an economic treatise but it is political nonsense; Balls and co. will have a field day and cutting government expenditure in an economic slow down will look plain silly. I suggest most of the above correspondents want tax cuts for them selves but expect somone else to do the hard work of selling them. Smell the political coffee guys.

[David Sergeant]

By the way I have just read Corin Taylor. I have to say that it is a good attempt at selling tax cuts, the trouble is she does what so many tax cutters do, she dodges the problem of defining the specifics of reduced public expenditure, which is what voters are interested in and Labour have established their position with virtually all the media. Expect even the Times and Telegraph to repeat Ed Balls'd estimates of the numbers of nurses, teachers and police being cut. Most of the above suggestions for government cuts would be seen as way out to the point of childishness.

[Alex]

One historical point: The TPA says that raising taxes in a recession is the worst possible policy. I agree it's hardly desirable, but it's precisely what the Tories did in 1981 (Howe's budget, which has entered party folklore as the turning point for the economic recovery of the mid-1980s) and again in 1993 (Lamont and Clarke's budgets). In both cases the medicine was applied to reduce big deficits and facilitate lower interest rates. It's interesting that what happened from 1993 onwards was not an economic catastrophe, but rather a textbook, export-led recovery.

Provided the deficit is low or there is a surplus, it makes sense to allow borrowing to rise in a recession through the operation of the 'automatic stabilisers' (lower tax receipts, higher benefit outlays due to more people unemployed). BUT the corollary is that during the good times the budget should swing into surplus - this is where Brown has gone wrong with his spending binge since 2001. What Philip Hammond says would make sense if there was scope for borrowing to rise without threatening the long-term health of the public finances; the problem is that we have a deficit of 3% of GDP going into a downturn.

Therefore there is little chance the budget will balance over the economic cycle, even if we have several years of strong economic growth from 2009 onwards. Which means spending growth should probably be trimmed further to 1% per year or even frozen in real terms if tax increases are to be avoided.

(Note that from 1989 to 1992, when the economy went from unsustainable boom to bust, the public finances deteriorated astonishingly rapidly, going from a surplus of roughly 1.5% of GDP to a deficit of 7%. This was partly because of a spending binge leading up to the 1992 general election, but also because of the impact of the recession. It took Lamont and Clarke's tax increases and tight spending settlements to get things back on a sustainable path.)

[Alex]

The TPA also talks about the 'dynamic effects' that can be expected from the US fiscal stimulus. The extent of these is hotly disputed by economists even if we were talking about a well-crafted supply-side package, although I would guess that a reduction in the high US corporate tax rate might boost revenues.

But that is irrelevant to the stimulus package actually being proposed in the US, which is to mail rebate cheques to taxpayers. It does not affect incentives and there is no reason to think this will raise the trend rate of growth. Rather, it is designed to pump-prime the faltering economy in classic Keynesian fashion (which the Bush administration has been quite keen on).

[Tony Makara]

"the medicine was applied to reduce big deficits and facilitate lower interest rates."

Alex, the problem we have now is that Brown has made us so dependent on imports that once interest rates come down and sterling prices in the high-street are going to rocket. Thats why Gordon Brown has pursued a strong pound policy to the point where our currency has become completely overvalued. Forex experts are now predicting that the pound is certain to 'do a dollar' and fall significantly in value, so inflation is on its way, and problems with liquidity and a stagnant economy mean that the BOE will not be able to counter this. Looks like we are about to be shot by both sides. In other words stagflation.

[Alex]

Stagflation (at least in a mild form) was a problem in 1981 and 1993, too. That was one of the reasons the government had to tighten fiscal policy at the same time as easing monetary policy: it had to convince the markets that it wasn't simply going to let inflation rip. What happened after the 1992 devaluation was that resources were shifted into exports and that (rather than consumer spending) is what drove the recovery of output and employment. I'm not convinced we're on the right policy path to achieve that this time.

[Tony Makara]

Alex, the problem is that we have now lost the infrastructure necessary to export goods, we are now a passive buying nation rather than a active exporting one.

[David Boycott]

Fiscal fine tuning does not work. That was the lesson of the 1960s and 1970s. That is why macroeconomic policy has been almost solely conducted through monetary policy since the 1990s, when the UK adopted an inflation-targeting approach.

By contrast, the 1980s and subsequent economic performance showed that fiscal policy has substantial microeconomic effects. That is why the rest of the world is moving to lower and simplified taxes. There is no bad time for us to join the rest of the world in making this move and reversing the damage inflicted by Brown's consistent record of raising and complicating taxes.

[Yet Another Anon]

No opposition ever cut spending or taxes we need to win.
In 1970 the Heath government was elected on a programme of cuts (which they failed to do, but they were elected on it nevertheless), Labour's spending committments in it's first 2 years of government saw quite a squeeze on public spending - restricting growth in NHS spending for example, although bizzarely with Kenneth Clarke actually urging Gordon Brown to put in more dosh at the time.

[Tony Makara]

Just watched the Jeff Randall programme on TV and he squarely lays the blame for the credit boom/crisis with the Labour government. Hopefully now more people will point out that the Gordon Brown strategy of using debt to create demand has created the illusion of a healthy economy. The prosperity that many thought had come about as a result of Labour policies has been a mirage.

[Alex]

David, I agree that fiscal fine-tuning doesn't work very well - but this isn't the same thing as allowing the automatic stabilisers to operate, which most economists agree is a good idea. It is sensible to run a surplus during periods of above-trend growth and a deficit during a downturn, helping to dampen the fluctuations in the business cycle - but not to fine-tune the economy through discretionary changes in policy. Ideally, the goal should be to balance the budget over the cycle and leave the main job of macroeconomic management to monetary policy.

That said, it's one of the many misunderstandings of 'monetarism' under the first Thatcher government that they relied wholly on monetary policy and thereby controlled inflation. They tried that for two years, but the money supply persistently overshot target (because of problems of both definition and control) while the real economy was being strangled with sky-high interest and exchange rates. So they quietly changed course in late 1980 and especially the 1981 budget, when Howe shifted the burden of the counter-inflation effort onto fiscal policy specifically to give himself scope to cut interest rates and facilitate a lower £. Clarke did the same thing in the early 1990s - and in both cases growth recovered and inflation came down.

Therefore I think that the view that active fiscal policy is always wrong needs qualification. Sometimes the deficit is too high and actually inhibits sensible monetary policies, and the fiscal situation has to be addressed as a macroeconomic (and not just a microeconomic) priority.

Equally, there may be situations where demand has contracted so much that expansionary fiscal policy may need to brought into action alongside monetary policy in order to ward off a recession. This is the thinking behind the stimulus package in the US; it's nothing to do with supply-side tax cuts. Which is not to say it's necessarily going to work - but it's being misconstrued (eg in a Telegraph editorial a few days ago) as a tax-cutting policy when it's really a classic demand-side Keynesian stimulus.

The problem we have in the UK is that with such a large deficit the government may have to actually *tighten* fiscal policy into a downturn (as in 1981 and 1992/3). If spending had been lower over the past few years there would be more room for manoeuvre and the automatic stabilisers could cushion the downturn.

[Tony Makara]

Alex, the future Conservative government must set its emphasis on supporting the supply-side. Particularly for producers, we've got to get away with Labour's quick-fix policy of inflating demand through credit and then hoping supply will respond. Instead we've got to get back to supply providing the lead and iron out artificial demand. We have been very lucky to escape serious inflation so far and that has only happened because of the strong pound and imports. However we can see that too much money, artifically generated through credit, has been chasing too few goods in housing leading to inflation. Labour have destroyed sensible pricing in that market with their credit culture.

[Alex]

To be fair, monetary policy has been set by the Bank of England rather than Brown, but I agree it was too lax for too long and that contributed to the housing market bubble and debt build-up. (Brown has been running the government's finances in a similarly imprudent way to consumers, so he certainly doesn't escape blame. His switch in the inflation target from RPI to CPI, which excludes housing costs, was also politically convenient and economically dubious.)

However, a bigger factor in the credit crisis, Northern Rock etc would seem to have been the regulatory environment and the problems in bank supervision rather than demand-side policy.

There may also be a cultural addiction to debt in the UK, as Jeff Randall suggested.