Pain with a purpose

17 Jun 10
The June 22 Budget will herald major spending cuts to tackle the country's debt crisis. But there is also a wider strategic goal, argues Colin Talbot - and it's called rolling back the 'Big State'
By Colin Talbot

17 June 2010

The June 22 Budget will herald major spending cuts to tackle the country’s debt crisis. But there is also a wider strategic goal, argues Colin Talbot – and it’s called rolling back the ‘Big State’

We are edging, slowly and hesitatingly, towards the sort of debate about the future of Britain that should have happened during the general election, but which all the parties studiously avoided. The ‘big debate’ about long-term spending plans is finally starting properly, kicked off by the ambiguous first report from the much-vaunted Office for Budget Responsibility. As the debate started to shape up, the Observer’s William Keegan asked: ‘They call it “pain with a purpose”. What purpose, exactly?’

One possible purpose is becoming increasingly clear – it is what we can call the ‘Big State’ story, and it comes mainly from the Tory part of the Conservative-Liberal Democrat coalition. It goes something like this: New Labour ran up huge public debts by wasteful spending on unnecessary public bureaucracies. It also allowed, encouraged even, private debt – of households and businesses – to become dangerously high. Public debt led private debt, until an inevitable collapse occurred. The state has become too big.

The task now is to rebalance the economy mainly by shifting resources out of the public sector and into the private. Long-term that means a much smaller state, and the public sector debt crisis provides the ideal opportunity to solve the deficit problem and shrink the state. The purpose of the pain is not to just reduce the debt, but to reduce Big Government.

This is the message that Prime Minister David Cameron has been trying to get across. The deficit and debt is all, or mainly, ‘structural’ as he said in his speech on the economy on June 7. He added about the deficit reduction strategy: ‘[The] decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades, to come.’

If you wanted to put figures on it (and the government is avoiding that) we are talking about shifting public spending from its historic average of about 43% of gross domestic product to somewhere south of 40% – probably nearer to 36% – permanently.

Let’s be very clear, this means a fundamental reconfiguration of the state and welfare spending – the ‘post-bureaucratic state’ that Cameron talked about, briefly, during the election. This is not just about economic management, of ‘dry’ Treasury orthodoxy versus Keynesian recession management, as most commentators think.

To be sure, the possibility of tipping the economy back into recession is a real one, as many experts, such as Nobel laureate Paul Krugman, have pointed out. We could even end up in a ‘lost decade’ ­scenario like Japan in the 1990s. But the issue here is in a sense bigger: what sort of country do we want to live in?

In broad terms, Britain sits between the social welfare capitalist states of Europe, where public spending varies between just under half and two-thirds of GDP, and the liberal welfare capitalism of the US, where public spending is closer to a third – with the rest made up for by the ‘Big Society’. The US’s highly active voluntary sector – Americans give more time and money to voluntary activity than
Europeans – partially plugs the gaps left by their much less active state.

This is the sort of historical shift that Thatcher dreamt of when in power but never achieved. To be fair to the Tories, it is not entirely clear that this is what they are now indeed after. It was not that long ago that they were routinely pledging to match Labour’s spending plans pound for pound (even when this was creating the deficit they now so loudly complain about). Their pledges on the NHS and overseas aid seem to run counter to this return to a ‘roll back the state’, while their more general rhetoric about the Big ­Society seems to imply that they do indeed want a new rollback.

The picture is further confused by the existence of the coalition – it is unclear where the LibDems stand. What size, and role, do they want for the British state in the future? It’s clear they are for a ‘rolling back’ in areas such as civil liberties, but on the big central issue of public spending and taxes they have been much less clear. Their policies, not that long ago, were marginally to the Left of Labour – favouring slightly higher public spending and higher taxes to pay for it.

They adopted some tactical ‘slash and burn’ cuts rhetoric during the crisis and in the run-up to the election, but it’s not at all clear they had thought that through in terms of long-term implications. Some – and not least Deputy Prime Minister Nick Clegg – do seem to have adopted a neo-Liberal stance which is closer to that of the more right-wing Tories – roll back the state, plug the gaps (if at all) with voluntary activity. But as a whole the LibDems are, usually, more ‘European’ in their approach than ‘American’. Has that changed?

The ‘emergency Budget’ will not tell us the details of where the cuts are going to fall, but it will give us some clues as to whether the government’s objective is to stabilise our economic balance at, or near, the historic average of 43% of GDP or go for what the IMF euphemistically calls ‘structural adjustment’ – a fundamental down-sizing of the state. This will come in the forward projections for the public finances up to the end of this Parliament.

In most Spending Reviews conducted by the last government, the framework was set out in the Pre-Budget Report published the autumn before the review itself. The emergency Budget will be used to do this job for the Spending Review promised for this autumn. The new review will go further than previous ones in setting out firm government spending plans until the end of the Parliament, covering four years, not three (ie 2011/12 to 2014/15).

It is what the Budget tells us about plans for future spending until the end of the Parliament (as a percentage of GDP) that are important to look for on June 22. The forecast from the Office for Budget Responsibility, published on 14 June, is not much help because it bases its forecasts on the Labour government’s projections for spending up to 2014-15. Labour was aiming, you will recall, to halve the deficit by then.

Although the OBR predicts slightly lower growth – because of changes to other assumptions – even sticking to Labour’s spending plans would bring the deficit down by more than predicted in the March budget and would make it slightly lower than Labour estimated. Hardly ‘it’s worse than we thought’.

So if Chancellor George Osborne and Chief Secretary to the Treasury Danny Alexander are going to do anything radically different from Labour’s plans, they either have to increase taxes and/or ­significantly reduce long-term spending plans. And they are going to find it hard to repeat the ‘it’s worse than we thought’ mantra because it clearly isn’t – although I doubt that will stop them trying.

Much of the comment on the emergency Budget will undoubtedly focus on the short-term economic management ­issues, and these are important and could have disastrous long-term consequences if the government gets them badly wrong. But the real issues are strategic – where are we going, what is the purpose behind the pain?

It is not certain we’ll get a clear answer on June 22. But if the central message of the Budget is that ‘it is a lot worse than we thought’ and ‘we have to cut much harder, deeper, and longer, than Labour planned’ we will know a strategic choice has been made. And that is that the coalition plans to succeed where Maggie failed and really roll back the state in ways that will affect us ‘for years, perhaps decades, to come’, as Cameron puts it.

Colin Talbot is professor of public policy and management at Manchester Business School

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