Behind the alarmist headlines about public spending “rocketing” to “1970s levels” – aided somewhat by some unhelpful framing and language used by its authors – today’s report from the Resolution Foundation makes some useful points.
Looking at existing pre-manifesto Conservative and Labour public spending commitments, the report estimates the likely impact on public finances, showing that spending as a proportion of GDP is set to exceed 40 per cent under both parties’ plans by 2023/24 – with due warnings about the need for tax rises to pay for this.
In our report – Lessons from a decade of failed austerity – we challenge the concept of the economy as a household budget that still dominates so much of the debate.
There is a dynamic link between public spending and GDP – projecting current spending plans as a burden on public finances fails to recognise the positive impact that investment in public services will have on future growth.
As Geoff Tily points out:
Macroeconomics tells us that government spending strengthens the economy and can improve rather than damage the public finances. The austerity decade has proved the macroeconomics in reverse. Spending cuts across nearly all advanced economies severely damaged economic growth and had a disastrous impact on workers’ pay and didn’t fix the public finances.
We agree that party spending plans should be linked to a long-term fiscal strategy – but that strategy must be based on the understanding that government spending actively boosts demand, supports growth and delivers the public services that are crucial to our economy and our communities.
It’s precisely because we face such an uncertain future with the impact of Brexit and global economic headwinds that we need a proactive fiscal strategy and a state that supports resilience and growth.
Our public services are in dire need of investment following an unprecedented prolonged squeeze on funding, as the Resolution Foundation report makes clear:
Government spending per person is set to come very slightly under £13,000 in 2019-20 (in 2018-19 prices), which remains 3.6 per cent down on the 2010-11 peak of £13,465. Under the plans in place ahead of the election, this peak isn’t expected to be surpassed until 2023-24. Such a 13-year pause would almost double the seven-year record associated with privatisation in the 1980s .
And we need to remember that these cuts have had a massive impact on working class families in the real world, outside of arguments about public finances. Our research shows that is lower income households that bear the brunt of public service cuts.
The chart below shows that for the lowest decile, the cuts are equivalent to almost a fifth (18%) of their earned income, compared to just 0.4% for the highest earners.
This means real loss of services that working class families rely on. Since 2010 we’ve seen:
Finally, the report also gets it right about growing and changing demand.
Yes, we need to restore the services and capacity that we’ve lost over the last ten years.
But we also need to build for the future too. Under current spending plans, we are in danger of falling short.
Government spending increases of around 3 per cent per year for the NHS over the next three years, is well short of what the Health Foundation estimate is needed to deliver the changes and capital investment needed in the Long Term Plan.
Research we published with the New Economic Foundation shows that for local government to deliver the same service levels it did in 2010, we’d need an additional £25bn by 2025.
So we would strongly caution against glib narratives about 1970s levels of public spending.
Whatever government gets elected in December we need politicians to put working class families first.
The country is in desperate need of a plan for rebuilding public services fit for all our communities and a fiscal strategy that supports a strong and growing economy.
Always bear that in mind, when it comes to the debate about public spending in this election campaign.
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