Tax and Fiscal Policy

Budget week: The tyranny of the status quo


Economic Theory
It’s what the great economist Milton Friedman described as “the tyranny of the status quo”. Every Budget week, we hear lots about the so-called “losers” of expected or announced decisions by the chancellor on government spending. Over the weekend, for example, there was a lot of noise about potential further cuts to the welfare bill. Despite government spending being largely about redistributing money from one group to another, we rarely hear about those who gain from spending restraint.

This is partly because there is no readily identifiable group which does so. When the chancellor cuts spending, it is general taxpayers now or in the future (if financed by borrowing) who find themselves financially better off. But this human emotional bias against change is a key reason why any Budget which protects government spending or beefs up existing programmes is celebrated, while those that cut spending significantly are spoken about as if the world is falling in. It’s as if everything government does right this second is undebatable, making change controversial.

Chancellors too are prone to this bias. Despite George Osborne often talking a good game on cutting spending, he regularly makes a virtue of “protecting” swathes of government activity – insulating from cuts (in one way or another): NHS spending, the state pension and other pensioner benefits, the defence budget, international aid, and per-pupil schools funding. And though Osborne is cutting the overall size of government as a proportion of GDP and pledging to run a budget surplus a full 10 years after entering office, he almost always uses favourable changes to forecasts as an excuse to ease up on cutting spending.

That’s exactly what happened in November’s Autumn Statement. The Office for Budget Responsibility had revised the way it forecasts the tax take and predicted a larger-than-expected revenue bonanza. The actions of the Bank of England had also lowered forecasts for the government’s debt interest costs. As a result, there was an underlying forecast improvement in the public finances of £27bn. But rather than using this improvement to make more progress in eliminating the budget deficit, Osborne decided to ease up somewhat on his planned spending restraint.

Now, just over three and a half months later, it has been said that the chancellor is seeking another £4bn in spending cuts from this Budget, mainly because the economy is now believed to be smaller than expected in November. Already this is being painted as the chancellor attacking “soft targets”, pencilling in further restraint of departmental spending and welfare later in the Parliament. For this, Osborne can expect rough headlines this week of “more austerity”.

Yet the truth is the chancellor has made a rod for his own back. He made himself a hostage to fortune, assuming in the last Autumn Statement that low interest rates and strong economic growth would be sustained through this Parliament. Though these were not unrealistic assumptions, if either went off course or the size of economy was revised down, the savings announced then were never going to be enough to meet his own targets. He was bullish when it would have been safer to be prudent.

Perhaps more significantly, his continued policy of ring-fencing the vast majority of expenditure and salami slicing what remains means that several areas of government spending, such as working age welfare and local government, are facing very significant spending cuts indeed, even though overall government spending is largely flat in real terms.

Ideally, the chancellor would revisit his decision to protect so much government activity. But that looks unlikely. Politically, there’d be a high price to be paid for reneging on promises. Given he’s boxed himself in so much, though, perhaps in future he’d be more inclined to bank good news and pocket the wiggle-room it gives him, rather than attempting to capitalise on it with giveaways. After all, today’s giveaways become tomorrow’s status quo. And reversing them comes at a high price too.

Ryan Bourne is the IEA’s Head of Public Policy. This article was first published by City AM.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.