Was the Spending Review worth the effort, when it is the economy right now that demands our attention?
By Mark Wallace
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Today, the great Spending Review circus comes to a close – the custard pies have been thrown, Ed Balls has done a lap in his clown car and now the Chancellor will walk the House of Commons high wire as the final act.
While it has provided much entertainment, from the National Union of Ministers’ early noisemaking through Star Chamber threats to Vince’s brinkmanship, we must ask: what is it all for? The negotiations refer to spending in the 2015/16 financial year, meaning that the measures announced today might only be in place for a month, should Labour win the General Election.
Given that, might attention not be better spent looking at economic performance during this Parliament? How is the Government doing on the deficit, tax, deregulation, infrastructure and education, the key policy levers for restoring growth in the UK?
This has always been the lynchpin of the Chancellor’s economic strategy. Confidence in the UK as a place to spend money, both for domestic businesses and international investors, rests on his determination to reduce it – and his success in doing so.
It’s fair to say that, leaving aside those who think borrowing can rise forever, most commentators (including ConHome) welcomed George Osborne’s original Emergency Budget as a good start. And it was - certainly his determination was clear.
But the deficit reduction plan he set out has not come to fruition. Let’s remind ourselves of what was intended. From a peak of £156.3 billion in 2009/10, the deficit would fall as follows:
- 2010/11: £149bn
- 2011/12: £116bn
- 2012/13: £89bn
- 2013/14: £60bn
- 2014/15: £37bn
- 2015/16: £20bn
Needless to say, it hasn't happened that way.
While the deficit fell substantially to an almost on-target low of £118.5bn in 2011/12, in the last financial year it actually rose by £300m. Deficit reduction has stalled, leaving a growing a gap between the position the nation was meant to be in and the grim reality. In 2012/13 that gap was almost £30bn wide.
To put that in context, the entire Spending Review, with all its drama, has secured £11.5bn of savings.
Then there is the question of the permanence of deficit reduction. Understandably, the Chancellor and the Prime Minister justified the policy by pointing to the economic crisis, but they have yet to publicly make the case for a permanently smaller state.
This is an essential next step – one which will hopefully feature in the explanation of how Britain can compete in “the Global Race™”. If they are to head off a return to high spending then they must remove the opportunity for Labour to pretend it is possible.
Economic recovery requires two fundamental changes in the tax system – rates must be lower, and the system must be simpler.
To be fair to George Osborne, there has been some movement in the right direction. The income tax threshold has been raised; the wasteful and nakedly political 50p tax rate has been cut; and Corporation Tax has seen a steady and sizeable reduction in each Osborne Budget.
But that is about as far as it goes.
The difficulty of the deficit battle might account for Osborne’s reluctance to cut rates across the board, but it does not explain the lack of tax simplification. As the 2020 Tax Commission laid out in great detail, simpler taxes are far preferable to the Gordian (or perhaps more accurately Gordonian) Knot which HMRC currently oversees. No-one expects full flat taxes overnight, but the direction of travel should be clear.
The Chancellor has abolished some tax reliefs on the advice of the Office of Tax Simplification, but there is no campaign by the Conservative leadership to even lay the ground for sizeable unravelling of the current mess, still less legislative steps to make it happen.
Again, this is a question of the long-term landscape as well as shorter-term economic performance. Without systemic reform, and good communication to build public support for such reform, there will be less growth before 2015 – and the door remains open for a return to the bad old days.
Plans to cut red tape are similarly troubled.
Michael Fallon, since his appointment to be the Chancellor's man in BIS, has had some success - such as extending the "one in, one out rule" to "one in, two out".
But the large scale action required to set business free to boom has yet to transpire. While £4bn of regulatory costs have been eliminated, £3bn of new costs have been imposed in the last two years. The reason ministers are fond of citing the number of regulations they have scrapped is that these are almost all the smaller threads of red tape, while the great ropes of it remain largely intact.
Even my former boss Simon Walker, Director General of the Institute of Directors and a great supporter of Fallon's deregulatory work, criticised the Queen's Speech on this very topic, saying:
"The Government has lost its last chance to introduce legislation to unleash business before the next election."
There are two hurdles yet to be confronted. First, the fact that employment regulation is one of the most cited burdens on business, but is apparently untouchable after the Yellow-on-Blue attacks over the Beecroft Report.
Second, according to Open Europe 70% of regulatory costs faced by business are imposed by the EU. So far, none of this has been touched.
With the Lib Dems, and Brussels, sadly not going anywhere soon, it is hard to see either problem being successfully overcome before 2015.
But BIS ministers grappling with regulation can take some comfort from one thing - at least they aren't responsible for delivering transport or energy infrastructure.
With a Global Race™ narrative to promote, increasing our airport capacity should be an obvious step. The South East in particular is simply running out of slots for planes, just as our international competitors establish new routes to growing foreign markets.
Instead, we have the bizarre sight of a cash-strapped government telling all the private investors queuing up to fund new runways that they will have to wait until the Davies Commission reports, after the General Election.
HS2 is going ahead, of course, but compared to the proven economic benefits of international air links, its promises of shaving minutes of a journey to Birmingham (at vast financial and political expense) rather pale by comparison. Ironically, HS2 trundles on without any certainty of which, if any, airports it ought to connect to, further reducing its value.
Energy, effectively in enemy hands under Huhne and now Davey, hasn't even got that far. With an approaching energy gap and high costs for manufacturers, they have delivered costly wind farms, no agreement on new nuclear and, until Osborne intervened, foot-dragging on shale gas.
There are no overnight infrastructure fixes - building airports and nuclear power stations or fracking shale reserves takes time - but we should have far more to show by this point. Investor confidence in these industries suffers every time the Government drags its heels or changes its mind - and investor confidence in the wider economy is harmed every day we creep closer to the point that the energy or the airport slots run out.
Education and Skills
By contrast, Michael Gove has been the busiest of bees. As I've written before, the fundamental, structural reforms he has introduced offer a bright future for British pupils.
Improved literacy and numeracy, more rigorous exams and a higher standard of teaching are obviously beneficial to the children involved, but they will also flow through to the wider economy. The more great employees and able entrepreneurs we produce as a nation, the faster we will grow.
By its nature, though, education is a lengthy process - a fact which even the most radical minister can't change. The first pupils to have started school with Gove as Education Secretary won't join the workforce until 2025 - though of course others benefiting from free schools at secondary level will have left before then.
Why has this happened?
Given such a patchy report card, one wonders all the more whether the Spending Review was the best focus for so much time and effort. If there is no economic growth, then it looks unlikely that any of the Ministers negotiating the 2015/16 departmental budgets will be there to implement them.
The reasons for such slow progress are hotly disputed. It's certainly true that on some topics (such as energy and employment regulation) the Lib Dems have made life almost impossible. But attempts to blame the realpolitik of coalition for the failure to act on airport capacity, for example, simply do not hold water.
The depressing fact is that the Conservatives set ourselves up for the airports mess while in Opposition - and compounded it with the appointment of a Transport Secretary personally opposed to a policy essential to the future of the nation's transport infrastructure.
Many ministers have grasped that the only chance of being returned for a second term in 2015 is to govern as if they are only in power for one term - and have therefore motored ahead regardless of the objections of vested interests. Some, however, were either not prepared for the difficulty of the task ahead or were sent reeling by the amount of incoming fire they attracted when they began.
There are causes beyond Westminster, too. While they undoubtedly support deficit reduction, at times the voters have wavered when confronted with the scale of reform required to get Britain back on its feet. That is in part due to the late stage at which the pledge to match Labour's spending plans was abandoned, but it is also a result of the sheer size and reach of the state at the end of New Labour's time in office.
There is much work to be done in securing our economic future, from forming and implementing the policies required through to the essential task of explaining to the electorate what it will involve and why it must happen. The Spending Review has generated a lot of headlines, but I'm not convinced it has contributed at all to getting that job done.