A radical plan for spending in 2015

The month of August is likely to be one of reflection and planning for the respective leaders of Britain’s political parties. The Prime Minister will be in an upbeat mood as his party seems united on issues previously considered flammable; the EU, immigration, same-sex marriage, and UKIP. Word from inside CCHQ is that all efforts are now focussed on winning the general election in 2015. The Conservative party would therefore be doing well to lend some serious thought towards its manifesto pledges. Contrary to what many say, Crosby will have influence over what goes into the manifesto, no themes such as the big society and  vacuous unfunded IOU politics. I would like to see clear and coherent policies which contribute towards a conservative programme of government. One springs to mind, combining themes of fiscal responsibility and welfare.

The Conservative Party should introduce the idea of an overall public spending cap on Annual Managed Expenditure (AME). AME is the part of the budget that contains ‘automatic stabilizers’ such as unemployment benefits and also long term social security liabilities such as incapacity benefits, and state pensions. Politically the Conservatives must remain the party for workers, taxpayers, and  against welfare. Conservative supporters are angry also at the weak approach to reducing welfare spending as part of the economic rescue. Ideologically there is an argument that AME remains too high and cuts imposed so far are irrelevant. To put things into context the Government have succeeded in forcing through an austerity agenda involving just a 3% spending cut. The Chancellor has revised debt to GDP forecasts up, expectations for reaching a balanced budget (0% current account) have been postponed almost indefinitely, and the target spending as % of GDP has been revised from 33% (a long held conservative ideal for Government) to 39%. Welfare is forecast to rise in real terms between 2010 and 2015. Due to ring fencing of budgets for Health, International Aid and Education Capital spending, Departmental Expenditure Limits (non-AME) in other departments is forecast to have been cut 33%by 2015. To achieve the ideal level of spending at 33% of GDP the Government needs to continue cutting, and do it from the AME budget.

Two major think tanks have proposed ways to do this. Reform have suggested the setting of % to GDP figure, three years in advance of a budget announcement that would represent the total budget. This % (for instance 35% of GDP for Total Managed Expenditure) would be converted into a nominal figure by the independent Office for Budget Responsibility over a year in advance. If a Government breached the figure, they would have to report to Parliament and explain why. Policy Exchange suggested a more detailed cap on components of AME. An affordable cap would be placed on long term liabilities (state pensions) and short term spending spikes (JSA) would be funded through this cap and scrapping of other payments (for example working tax credits, which have contributed to lower incomes).

Proposing major cuts to welfare in the name of fiscal austerity is a real vote winner and something for the party to take up in the lead up to the general election. The reasons go much further than winning votes… sustained fiscal deficits and debt levels have crippled this country’s public finances and economy. Nordic countries, Sweden, Finland and Norway all operate public expenditure caps, and they all saw strong growth periods immediately after the global recession. This blog recognises the importance of public spending in some areas of our country, maintaining infrastructure, providing a modern and adaptable health and education system, as well as an appropriately sized social safety net. Without the financial power to fund these programmes, our government is redundant and we all suffer because of it. David Cameron should go to the polls in 2015 with plans for a radical overhaul of public finances and the welfare state, a plan as radical as Thatcher’s privatisation policy and the Butler Education plans in the 40’s and 50’s.

Why 0.6% is meaningless… and what we can do about it

On Thursday the Office for National Statistics announced that the UK economy grew by a paltry 0.6% in the 2^nd quarter of 2013. Coverage of the announcement and reaction was almost as jubilant and overtly hysterical as that of the royal baby’s arrival on Monday night. The reason being that this Government has staked its credibility in edging this economic metric, Gross Domestic Product, back into the black and into safe positive growth territory. The case for celebration must be muted, not because 0.6% is a disappointing figure, its meaning though is irrelevant.

The problem with this figure in particular is that only 40% of the information needed to make an accurate calculation for GDP was available and used. As a consequence it is likely to be revised as more information comes to light. This happened with the 2012 triple-dip recession ‘that never was’, and another revision is likely to show that not only was our original recession deeper, but our recent growth spurt has been shallower. Either way, GDP is difficult to calculate, liable for revision and highly likely to be inaccurate.

An alternative measurement for policy makers was suggested by new Bank of England Governor Dr Mark Carney. He suggested in a speech made last December that policy makers target economic output that has not been adjusted for inflation, Gross National Product (GNP). This would mean any economy suffering volatile performance would have to catch up with previous shortfalls to see any impact in its growth figures. This would be a good option if interest rates remained at zero.

Another recommendation would be to develop a new economic metric. Richard Lambert recommends blending together a calculation that takes into account median incomes, inflation, employment and gross national output. Lambert recognises that while employment rates remain quite high, median wages have stagnated. In fact real wages have remained at the same level since 2003. The number of working poor has increased as inflation has eroded real wages. Low interest rates are also obstructing thousands who remain over leveraged, a rate increase of just 2 points would sink a large portion of the mortgaged population into negative equity. Any new measurement that takes into account median wages (not the ‘mean average’ which is susceptible to high levels of income inequality), inflation would therefore reflect the prevailing state of people finances on the high street. Combined with a inflation stripped figure for national output would provide a decent indicator of our overall economic performance.

I would hesitate to say that the British economy is back to its best. Manufacturing remains 10% lower than pre-recession levels, construction is 16% lower, the economy as a whole is still 3.3% smaller than it was in 2008. TV newsreels were filled on Thursday evening of individuals from across the country who still complained that life remained hard on Main Street. Utility bills are still expensive, jobs hard to come by, and incomes have not risen. The ONS figures may be painting a portrait favourable within the heady world of macroeconomic analysis and political commentary, however it is not reflective of the real economic situation in our towns and cities. As George Osborne senses vindication for guiding the UK back into growth, his opposite number Ed Balls redirected the discussion to the depressed living standards experienced by so many across the country. He is right to note that GDP growth is not being felt across the country. It is as a metric of economic success ultimately redundant. As Richard Lambert said in the FT , “GDP fails to capture the economic well-being of most citizens”.