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Budget u-turn on spending is long overdue

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The priority now must be to repair the damage of ten years of Tory devastation.

Helping working families and rebuilding public services must come first. And we need to see concrete action on the challenges of the future.

This means banning zero hours contracts, sorting social care, ending the UK’s dire regional inequalities, setting out a credible plan to achieve net zero, and getting an EU trade deal that supports jobs and workers across the UK.

The headline spending figures

Made necessary by the devastation of the past decade, the new plans amount to a significant change of course.

  • Infrastructure spending will be boosted to 3% of GDP from 2% of GDP, as in the Conservative manifesto pledge.
  • Overall current spending will be boosted by around £35bn a year (over 1.5% of GDP), somewhat larger than the manifesto pledge of £3bn.

The backdrop: a weak economy

As well as needing to help held-back communities and the immediate requirements of coronavirus, the spending has been made necessary by the cyclical slowdown in the economy.

Growth over the past two years (1.3% in 2018, 1.4% in 2019) has been the lowest since the global financial crisis ended in 2010, and half of the pre-crisis average of 2.8%.

As in the chart below showing contributions to GDP, if the government hadn’t supported the economy, the feeble growth in 2019 would have been even worse. Business investment spending (in yellow) has completely dried in 2019 and 2020.

GDP(E) calendar year growth, ppt contributions

GDP(E) calendar year growth, ppt contributions
Source: OBR

Looking into future years the OBR has predicted growth averaging only 1.4%, with government playing a very big role in each year.

Spending: the details?

The government has announced plans to increase public investment spending to around 3% of GDP, up from the 2% level where it has been held since austerity policies began (see chart below).

This shift brings spending to levels last seen in the 1970s. Broadly this means infrastructure spending will now be at around the OECD average (which is constructed on a different basis), meeting a longstanding TUC call.

But while they have met this benchmark, the world has moved on. We now need a further boost of at least 1% of GDP a year for the coming three years, specifically to meet the climate crisis.

Current spending is more difficult to judge until more detailed plans are available. The chart below shows the annual growth in so-called consumption spending –spending on the employment and wages of public sector workers and on procurement from the private sector. The announced increases suggest strong growth over the next three years, at a pace last seen around 15 years ago (e.g. growth over 2019-2021 will be nearly 6% a year, pretty much the same as over 2005-2007).

A good way to understand spending is to look at departmental spending per head in real terms. The latest version shows spending just below the position in 2009-10 – a far cry from the decimation that had been planned by George Osborne. Of course, at least as important as headline figures is how the money is spent. Arguably, the real test going forward will be whether the Government prioritises rebuilding public services and helping those who lost out most under austerity in its spending plans.

The u-turn

This u-turn has been necessitated by failure not success. Austerity is ending not because it did its job, but because it didn’t work.

For a decade, austerity policies have devastated public services, workers’ pay and conditions, and crushed economic growth. In the meantime the underlying threat from private debt and financial speculation has been intensified not resolved. These conditions are common across the whole world and amount to a system that is dangerously precarious – with many fearing recession long before coronavirus hit. Once more central banks have acted decisively, with the Bank of England this morning announcing a 0.5% rate cut down to 0.25% and further subsidies to banks.

The government has – rightly – ditched its obsession with closing the deficit by cutting spending, and recognised that they need to invest to support the economy. This should be the final putting to bed of the myth that the government budget is like a household budget.

The political choices to come

Announcing the numbers is just the start of the process. Now we need to see whether the government will use these resources to get long overdue help to working families and public services. As Frances O’Grady said today:

Helping working families and rebuilding public services must come first. And we need to see concrete action on the challenges of the future.

This means banning zero hours contracts, sorting social care, ending the UK’s dire regional inequalities, setting out a credible plan to achieve net zero, and getting an EU trade deal that supports jobs and workers across the UK.

Frances O’Grady
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