It’s not as bad as you think

21 Mar 08
TONY TRAVERS | Many pints of ink have been used in explaining how last autumn’s Comprehensive Spending Review would reduce the growth in public expenditure.

Many pints of ink have been used in explaining how last autumn’s Comprehensive Spending Review would reduce the growth in public expenditure.

Local government, the NHS, schools, police and personal social services were all to be subjected to a squeeze. Widespread industrial action was predicted. Woe and gloom seemed inevitable.

Five months later, things look very different. The global banking crisis is leading to a rapid slowdown in the UK economy. From 3% in 2007, gross domestic product growth is likely to drop below 2% in 2008. If domino-effect banking failures accelerate, there may be a fully fledged recession. Or much worse.

The truth is, ‘experts’ in the City and on Wall Street have not the faintest idea how the current problems affecting banks’ liquidity will play out.

Bear Stearns has, in effect, followed Northern Rock into a form of nationalisation — in the US, no less. No one knows how many others might follow, or, indeed, how far the US, UK or European central banks would be able to bail out a series of really big banking failures.

Against this near-apocalyptic background, the CSR plans for public spending in 2008/09 to 2010/11 now look rather generous.

The NHS and schools will continue to enjoy real-terms increases in spending, while local government faces a real-terms standstill. The money for these services is guaranteed.

Public service jobs are relatively secure. There will even be a continuation of public sector capital investment in schools and hospitals. Such continuity and predictability now appears a blessing in the context of the wider economic position. Primary care trusts, councils and police authorities can plan ahead with reasonable certainty in the medium term.

Private companies, by contrast, face the risk of a serious drop-off in their profits. Householders with large mortgages are already turning in large numbers to Citizens Advice for help.

Public sector unions now face a dilemma. A number of them were planning campaigns against low pay offers or staged payments. It was widely expected there would be a ‘summer of discontent’.

But as the national economic picture has moved from boom to slump, so surely has any justification for industrial action. Indeed, it would appear decadent and risky to plunge the public sector into a round of strikes, just as the government was badly weakened by the threat of economic disaster.

If the economy stalls or goes into recession, public expenditure as a proportion of GDP will rise above the current level of 42%. The chancellor’s forecast suggests, on the basis of his revised growth projections, that this 42% figure will be constant in the next couple of years. But any further fall-off in growth or a move to recession would start to push this number higher.

At this point, either there would need to be an increase in public sector borrowing, or a tax rise or a cut in public expenditure. This latter option cannot be entirely ruled out if the economic position becomes worse.

Looking ahead, the existing CSR plans cover three years up to 2010/11. Spending Review numbers have always, since Labour took office, been honoured by Gordon Brown. There is no reason to believe last autumn’s figures won’t be delivered. Unless, of course, there is a very sharp slowdown, in which case, all bets will be off.

As the national press has been reporting, the Western economies are in a very unusual condition at present. The ghosts of the 1929 crash have started to visit Wall Street.

Back in the 1960s and 1970s, public expenditure cuts were an inevitable feature of the ‘bust’ part of the ‘boom-and-bust’ cycle that Chancellor Brown claimed to have put to an end. It was inevitable there would be a slowdown in the economy eventually, although no one guessed it would risk being so extreme.

Looking ahead, public services are probably reasonably protected for the next two or three years. But if the economy does not recover in the way predicted by Alistair Darling in his recent Budget, the next spending round will be the most difficult since Labour took office.

Of course, there will have been a general election by then, so political as well as economic change may have occurred.

David Cameron and Philip Hammond have been making it clear that they will keep to Labour’s spending plans up to the end of the CSR, but beyond then, no one knows.

In short, while the short-term outlook for public services is probably protected, the medium term is wholly unpredictable. A period of quiet contemplation by public sector managers and unions is probably in order.

It may take several months or longer before the global banking crisis is over. By then the world may be a seriously different place.

Did you enjoy this article?