Damian McBride is right: George Osborne maintains broad spending aim, but increasingly resembles Brown
26 November 2015
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Government and Institutions
Government and Institutions
Economic Theory
There have been four budget or budget-like statements in less than a year now. That’s four opportunities for the Chancellor to engage in a big-bang of announcements to improve economic policy and outfox his political opponents. In truth, these occasions, through so much focus on the political headlines, lead to tinkering and giveaways. The end result of all these statements is that the Chancellor, whilst having an overall aim of reducing state spending as a proportion of GDP, in many ways increasingly resembles Gordon Brown in his tactics and politicking.
This is a point noted by others (not least Damian McBride), but I think it needs teasing out a bit more.
First, Osborne always seems to announce some redefinition of some activity or spending that makes like-for-like comparisons of the public finances difficult. This time it was housing associations being brought on balance sheet. The Office for Budget Responsibility tries to correct for this by making like-for-like comparisons available, but over time it becomes more and more difficult to track the combined effects of all changes. The end result is that even those of us who try to keep up with these issues find it virtually impossible to navigate to consistent comparisons all the way back to 2010. Very similar to what happened under Brown.
Second, Osborne has a tendency to ‘talk dry, but act wet’. Brown spoke about his ‘prudence’. Osborne talks about getting a grip on the public finances. Though the deficit has fallen substantially since 2010, the Chancellor has continually let his deficit targets slip, and indeed substantially loosened spending in this Autumn Statement relative to plans. Over the course of this parliament, the government will spend £155 billion more than planned in the March budget. Real spending overall will rise by 0.3 per cent. Sure, some areas of government spending will see significant restraint, but that’s mainly because huge areas have been ring-fenced from any cuts being made to them at all.
Third, the Chancellor’s plans rely on optimistic forecasts and he appears to have a ‘borrowing bias’. Brown used to always say that his borrowing was sustainable because the potential growth rate of the economy was robust. He would ignore the argument about building up a buffer for when a recession (inevitably) hit. Osborne and the Conservatives criticised this approach, but now appear to be engaged in something similar. All of the Chancellor’s long-term projections for hitting his surplus targets are predicated on sustained robust economic growth, robust tax receipts and lower-than-previously-expected debt interest payments. These assumptions could all prove incorrect. But the interesting thing is how the Chancellor reacts to changes in forecasts. In the last parliament, when growth prospects and hence tax receipts were revised down, Osborne decided to react to it by not changing his spending plans at all and eliminating the deficit more slowly. Now that the forecasts are more favourable, he has used the extra room to manoeuvre to increase spending and eliminate the deficit more slowly than he needs to. One would have thought that the experience of the last parliament – where deficit reduction was predicated upon growth that did not happen – would have led the Chancellor to be more conservative in his approach last week.
Fourth, the Chancellor engages in stealthy tax rises and increasingly seeks to put the burden of certain government ambitions on business. As the IFS warned before the election, Brown’s recent history suggested that Chancellors’ tend to increase taxes in budgets and statements after elections. Yesterday, the Chancellor lived up to that warning, with provisions for higher council tax and increased, and probably self-defeating, stamp duty rates on buy-to-let and second homes. This came after the Chancellor said in the election campaign that no net tax rises would be necessary in this parliament to close the remainder of the deficit. On top of these there’s the so-called ‘apprenticeship levy’ – a payroll tax on companies with a wage bill over £3 million – and the national living wage, which between them will cost business £6.75 billion per year by the end of the decade.
Fifth, like Brown with increased spending on health, education and tax credits, Osborne has his own pet spending areas which are untouchable. His commitment to them is reshaping the state. For the Chancellor, it is spending on pensioners, international aid and health that are protected (and these have been increasingly buttressed with implicit ring-fencing of other areas too for this parliament: defence, schools funding, childcare and now the police too). This means that unprotected areas have to make very significant savings. But overall the trend from Brown is similar – the ‘welfare’ state stays largely protected with more savings coming from other areas.
Finally, the Chancellor like Brown increasingly tries to make a virtue of his own U-turns, and is slipping into the Brownian tendency to judge commitment to and quality of services by how much money is spent on them. On tax credits, he was right to abandon the planned reforms, which would have significantly raised marginal tax rates on low earners. But he also made great play of protecting the police too. In many areas now: health, aid, the police, defence – the Conservatives seem to endorse the view that how much you spend on an area is a good proxy for what you can expect to get from it. It’s almost as if they believe the scope for reform to deliver improvements in many services has been exhausted. This could make advocating more cuts later or in worsened economic conditions much more difficult.
Now of course, as Janan Ganesh has outlined, Osborne ultimately has a different (at least stated) goal to Brown – for smaller government and running a fiscal surplus. My point here is that in many of his tactics he resembles his Labour predecessor, and further that some of these tactics may even undermine his longer-term ambition.
Ryan Bourne is the IEA’s Head of Public Policy.
This is a point noted by others (not least Damian McBride), but I think it needs teasing out a bit more.
First, Osborne always seems to announce some redefinition of some activity or spending that makes like-for-like comparisons of the public finances difficult. This time it was housing associations being brought on balance sheet. The Office for Budget Responsibility tries to correct for this by making like-for-like comparisons available, but over time it becomes more and more difficult to track the combined effects of all changes. The end result is that even those of us who try to keep up with these issues find it virtually impossible to navigate to consistent comparisons all the way back to 2010. Very similar to what happened under Brown.
Second, Osborne has a tendency to ‘talk dry, but act wet’. Brown spoke about his ‘prudence’. Osborne talks about getting a grip on the public finances. Though the deficit has fallen substantially since 2010, the Chancellor has continually let his deficit targets slip, and indeed substantially loosened spending in this Autumn Statement relative to plans. Over the course of this parliament, the government will spend £155 billion more than planned in the March budget. Real spending overall will rise by 0.3 per cent. Sure, some areas of government spending will see significant restraint, but that’s mainly because huge areas have been ring-fenced from any cuts being made to them at all.
Third, the Chancellor’s plans rely on optimistic forecasts and he appears to have a ‘borrowing bias’. Brown used to always say that his borrowing was sustainable because the potential growth rate of the economy was robust. He would ignore the argument about building up a buffer for when a recession (inevitably) hit. Osborne and the Conservatives criticised this approach, but now appear to be engaged in something similar. All of the Chancellor’s long-term projections for hitting his surplus targets are predicated on sustained robust economic growth, robust tax receipts and lower-than-previously-expected debt interest payments. These assumptions could all prove incorrect. But the interesting thing is how the Chancellor reacts to changes in forecasts. In the last parliament, when growth prospects and hence tax receipts were revised down, Osborne decided to react to it by not changing his spending plans at all and eliminating the deficit more slowly. Now that the forecasts are more favourable, he has used the extra room to manoeuvre to increase spending and eliminate the deficit more slowly than he needs to. One would have thought that the experience of the last parliament – where deficit reduction was predicated upon growth that did not happen – would have led the Chancellor to be more conservative in his approach last week.
Fourth, the Chancellor engages in stealthy tax rises and increasingly seeks to put the burden of certain government ambitions on business. As the IFS warned before the election, Brown’s recent history suggested that Chancellors’ tend to increase taxes in budgets and statements after elections. Yesterday, the Chancellor lived up to that warning, with provisions for higher council tax and increased, and probably self-defeating, stamp duty rates on buy-to-let and second homes. This came after the Chancellor said in the election campaign that no net tax rises would be necessary in this parliament to close the remainder of the deficit. On top of these there’s the so-called ‘apprenticeship levy’ – a payroll tax on companies with a wage bill over £3 million – and the national living wage, which between them will cost business £6.75 billion per year by the end of the decade.
Fifth, like Brown with increased spending on health, education and tax credits, Osborne has his own pet spending areas which are untouchable. His commitment to them is reshaping the state. For the Chancellor, it is spending on pensioners, international aid and health that are protected (and these have been increasingly buttressed with implicit ring-fencing of other areas too for this parliament: defence, schools funding, childcare and now the police too). This means that unprotected areas have to make very significant savings. But overall the trend from Brown is similar – the ‘welfare’ state stays largely protected with more savings coming from other areas.
Finally, the Chancellor like Brown increasingly tries to make a virtue of his own U-turns, and is slipping into the Brownian tendency to judge commitment to and quality of services by how much money is spent on them. On tax credits, he was right to abandon the planned reforms, which would have significantly raised marginal tax rates on low earners. But he also made great play of protecting the police too. In many areas now: health, aid, the police, defence – the Conservatives seem to endorse the view that how much you spend on an area is a good proxy for what you can expect to get from it. It’s almost as if they believe the scope for reform to deliver improvements in many services has been exhausted. This could make advocating more cuts later or in worsened economic conditions much more difficult.
Now of course, as Janan Ganesh has outlined, Osborne ultimately has a different (at least stated) goal to Brown – for smaller government and running a fiscal surplus. My point here is that in many of his tactics he resembles his Labour predecessor, and further that some of these tactics may even undermine his longer-term ambition.
Ryan Bourne is the IEA’s Head of Public Policy.
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