Autumn Statement: roll back the state?

31 Oct 16

The proportion of GDP spent on public services concerns far more than balancing the books – it is about the desired size of the government itself

When chancellor Philip Hammond makes his Autumn Statement on 23 November, most eyes will be focusing on what he does about balancing the books and investment. While these are important, they are about the short-term politics of a new chancellor and a new government. There is an underlying long-term controversy – mostly hidden – that is just as if not more important – how big should government be?

Let’s look at balancing the books. Hammond has abandoned George Osborne’s target, set out only in March, to achieve a budget surplus by 2019-20. This is significant because Osbornomics have been the lodestone of Tory policy since the autumn of 2008. Osborne’s speech to the Tory conference in 2008 ended the previous eight years of the party matching the Labour government’s successive spending plans from 2000 onwards.

It was only as the banking crisis began to take hold in 2008 that the Tories suddenly discovered Labour had been spending too much. However, they didn’t just break from Labour’s policy of mildly deficit financing of public spending – they became full-on balanced budget fundamentalists.

The October 2008 sudden conversion of the Tories to being a balanced budget party was remarkable – it was something they had not been for decades, certainly not since the 1930s. They carried this policy into coalition in 2010 and have pursued it ever since – until now.

Suddenly, we are being told a balanced budget is not as crucial as it was over the past eight years. The markets will not panic or the roof cave in if we don’t reach a surplus by 2020. This is a consequence of Brexit – there was no way Osborne’s target was going to be met anyway so Hammond is largely making a virtue out of necessity.

The Tories’ version of a balanced budget was notable for the emphasis on achieving it by cutting expenditure, not raising taxes. When US president Bill Clinton balanced the federal budget in the 1990s, he did it by both cutting spending and raising taxes – even dragging a reluctant Republican Congress along with him.

Osbornomics came under sustained attack from Keynesian economists for exacerbating and prolonging the slow recovery from the 2008 banking crisis and ensuing recession. This was and still is an argument about short-term demand management.

Beneath is a deeper issue – how big should government be? At the end of the 19th century, the British government spent about 10% of GDP; this rose in fits and starts until it more or less levelled out around 43% of GDP by the last quarter of the next century.

What was often missed in Osbornomics was a hidden longer-term objective to reduce public spending (and hence taxation) by reversing this historic pattern. The target wasn’t fixed but it is clearly there – in his March 2015 Budget, Osborne aimed to reach 36% by 2020. In his July 2015 Budget, it was 36.3%, his 2015 Autumn Statement said 36.5% and his last Budget in March said 37%.

This 6-7 percentage point change may not sound much but it would shift the UK from the middle of G7 or OECD countries to the bottom, with public spending more like that of the US or Japan, and have dramatic long-term consequences for services.

So amid all the talk, look at the forecast for public spending as a proportion of GDP by the end of this government. That will tell you a lot about how far Hammond has departed from Osborne’s aim to roll back the state further than Margaret Thatcher ever managed.

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