More on public spending

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Further to my post below on public spending, there are of course many good reasons why ever-higher public spending is a bad thing. Chief among these is the deleterious effect it has on economic growth.

The obvious point here is that public spending requires either taxation or government borrowing (which is really just deferred taxation). Both of these take money away from the private sector, where it can be put to productive, wealth-creating use, and spends it in the public sector, where it isn't. Moreover, these taxes also affect behaviour – they blunt people's incentives to work and produce, to start businesses and create jobs. Put simply, the high taxes that the doctrine of 'ever-higher public spending' requires make as poorer as a nation than we otherwise would have been.

It isn't just about the taxes though. The under-appreciated flip-side of that coin is that public spending itself – regardless of the taxes needed to fund it – damages economic growth. The reason is crowding out. When the state spends money in a particular sector, it crowds out private businesses that would otherwise have been performing the same function, or providing the same services.

If we didn't have a nationalized healthcare system, for example, we could have a much more profitable, wealth-creating private healthcare sector. Rather than being a drain on the resources of the productive private sector economy, as it currently is, the provision of healthcare could itself contribute to the wealth of the nation. The same could be said of the universities – higher education being something in which Britain can and should have a commercial comparative advantage. And perhaps most obviously, this is true in Britain's creative and media industries – if it wasn't for the anachronistic dominance of the state broadcaster, the BBC, this industry would be very much vibrant and dynamic.

Politicians should be glad to cut public spending, and ought to be brave enough to make the arguments for it.

Higher spending is not a good thing

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I'm pleased that the Conservatives have – at least in part – woken up to the fact that they are going to be forced to cut public spending if they win the next election. As Nigel blogged yesterday, the dire state of the public finances means that whichever party forms the next government is going to little choice in the matter.

What still annoys me – although I can well understand it from a political perspective – is that so many Tories keep referring to the 'painful decisions' and 'terrible choices' they are going to have to make. It's as if, regardless of Gordon Brown's astonishing fiscal incontinence, they still regard ever-higher public spending as, ipso facto, a good thing, which they'd love to stick to if only circumstances would allow it.

And that, of course, is complete rubbish. Why should the government spend more each year than it ever had before? Surely, at some point, enough is simply enough? This year the government will spend twice what it did in 2000. What useful things does it do now that it didn't do then?

OK, that was a rhetorical question. It's pretty clear that we don't really get any more for our money now than we did 9 years ago. All that extra cash – about £250 billion once you adjust for inflation – has achieved more or less nothing. So why keep throwing it away?

Cutting spending is not a 'terrible' thing, as so many politicians clearly believe. On the contrary, I'd say it was a moral imperative. Taxpayers' work hard for their money, and deserve to keep as much of it as possible. Public spending ought to be regarded as a necessary evil, and kept to the bare minimum required to fund essential services.

The right sort of incentive

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Healthcare is understandably one of the most sensitive topics in public discourse. However, many suggestions at reform are brushed off for dogged ideological reasons - despite the admittedly inconspicuous presence of markets at play within the NHS and indeed government itself, all suggestions that more conspicuous market incentives can be used are readily dismissed, even when they maintain a system that is both free and universal to patients.

The agents of these protestations neglect the fact that by merit of doctors being paid, or by hospitals having budgets allocated, a market already exists. The assumption goes that we must pay healthcare trusts, hospitals and even entire governmental departments according to what they 'need'. However, this results in those performing the worst being paid the most. The fact that the state is made up of people, often after power, influence, and larger budgets, appears to often be conveniently forgotten. The prevailing incentive is therefore for public bodies to allow bad outcomes, presumably up to the point where they would be penalised if the situation were to worsen any more. Despite the presence of excellent public servants, the market incentive to waste and run down a service is likely to be very strong.

The seemingly obvious solution would be to reverse the incentive, allocating larger budgets to those doing better, but this induces equally obvious problems - denying funding to those in genuine need of monies for improvement could have catastrophic consequences. There would at least have to be a minimum amount allocated to all public bodies upon which extra funding could then be procured according to better results.

The preferable option may be to continue with the existing system, but put in place countervailing incentives to achieve more specific desired outcomes. Sweden for example, after years of fruitless increases in funding aimed at decreasing hospital waiting times, recently set up a fund to pay those authorities able to cut queues below a certain level. The powers of market incentives were very quickly demonstrated, with all local authorities achieving the cuts within a mere nine months.

Anton Howes blogs regularly here.

Poverty, charity and the state

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Brown will reduce child poverty by making all families equally poor, while Cameron will take politics out of social action by putting the Conservatives at the centre of it. Where can one turn to for some logical thinking on poverty, charity and the state?

Certainly not to What are the implications of attitudes to economic inequality?, a report from the Joseph Rowntree Foundation that gives voice to a number of think tanks discussing economic inequality. Take the Fabian’s contribution for example. They cannot decipher the following facts: most people are not keen on an unequal society, but people do not want income to be redistributed and they certainly don’t want the government involved in this.

This for the Fabians is a political paradox. But it is only their paradox. Many people are not keen on inequality because people have sympathy for others and do not want to see fellow humans having a tough time of things. However, they don’t want to redistribute money because they prefer to look after their family and do not think simply giving money and resources to others is a real solution. The reason people don’t want the government involved is because they realize how inefficient it will be and because it has a bad record on this.

When will politicians follow the public’s instinct on this one? Gordon will bankrupt us to end poverty, while Cameron will destroy honest charities with the stink of politics. It is the choice between dumb and dumber.

YouTube: Amend the smoking ban

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A sign of the times?

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A very interesting article in The Times here, on stripping the Bank of England of its power and letting the market set interest rates.

Public expenditure – Cutting to the chase

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The horrific public borrowing forecast for this year of £175 billion – and the consequential £220 billion of projected gilts issuance – are certainly concentrating minds, especially those of credit rating agencies. The reality is that, irrespective of whichever party wins the next General Election, major public expenditure cuts will be obligatory; various percentages are currently being bandied about.

The key figure is the projected £671 billion of Total Managed Expenditure (TME) for 2009/10 - prior to interest payments. Future public finance policies should be based on implementing real cuts to that number. This £671 billion total is the sum of two key elements – Departmental Expenditure Limits (DEL) of £387 billion and Annually Managed Expenditure (AME) of £284 billion. Hence, any credible public expenditure cost-cutting strategy has to address how these two components can be sensibly reduced.

Imposing a top-down figure of projected cuts, say 2% in real terms per year for the next five years, would make sizeable inroads into public borrowing levels. In applying this top-down approach, it is clear that few exceptions should be permitted; otherwise, the cuts have to be higher elsewhere. Obvious targets for above-average cuts are parts of the massive social security budget - projected to cost £165 billion in 2009/10 - and local government expenditure, where efficiency levels are low and financial discipline is weak.

Given the grave state of the UK’s public finances, capital expenditure budgets will also need to be addressed, especially at the MOD, where cost over-runs - inevitably - continue. But experience shows that cutting public expenditure needs real political drive and determination. Since 1990, TME has risen from £360 billion to £583 billion in 2007/08 (based on constant 2007/08 prices). After all, even during the fierce assault on public expenditure during the 11-year Thatcher era, TME actually rose by just over 10%.

Building Britain's Future?

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As Philip mentioned yesterday, the government's latest re-launch – titled Building Britain's Future – is extremely underwhelming. It exhibits no new thinking or ideas whatsoever, and is indicative of a ruling party that has run out of steam. Nowhere is this clearer than in Gordon Brown's 'new' approach to public services.

Rather than attempting to undertake any kind of serious reform, as Tony Blair at least tried to do, the prime minister has decided to simply create lots of new 'rights' or 'entitlements', enshrine them in legislation, and hope that does the trick.

Plainly the government still believes, despite more than a decade of experience which should have taught them the contrary, that all they have to do is pass a new law and everything changes. The lack of intelligence this suggests is truly astounding.

The way to ensure that all patients are treated within 18 weeks of referral is not to pass a law to that effect, but rather to reform the health system so that supply reacts to demand. That means ditching the NHS's soviet-style central planning and letting markets (whether internal, or otherwise) allocate resources.

The government's new 'entitlements' will be no more effective than their 'targets' were. GPs met the 'appointment within 48 hours' target by only allowing people to book appointments 2 days in advance. Similarly, the 'A & E treatment within 4 hours' target was often met by keeping people waiting in ambulance bays or not registering them on arrival.

Moreover, giving legal priority to some areas of healthcare – like cancer treatment, where patients will have to right to see a specialist within 2 weeks – will invariably mean that other areas of care suffer in order to meet the requirements of the legislation. Maybe that's the right call to make when resources are limited, maybe not. Either way, it shouldn't be up to a headline-chasing government to set medical priorities. The preferences of healthcare consumers who are free to take their custom elsewhere should really be the key factor.

One last point: the government is now trying to avoid criticism for spending cuts by talking about planned 'underspends' in health, education and transport. It's just laughable.

Politics, pop and poverty

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Four years ago: A lot of noise and little else.

Burdening Britain’s future

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There are many bad Bills set to be brought before the House of Commons in Building Britain’s Future, Labour’s platform upon which they will be fighting the election. For example:

• As part of the Digital Britain Bill the government has decided to switch off FM radio. I for one still use it and find it entirely adequate for my needs and am not keen on being forced to buy a new radio because the government wants to direct technology. There is also a plan to introduce a legal right to broadband, which is preposterous in the extreme.
• The Child Poverty Bill will put into law the desire to abolish child poverty by 2020. This is something the Conservative government should immediately overturn if they come into power. In this instance a child is judged as being in poverty if they are part of a household earning less than 60 percent of median earnings. It is therefore not a goal to reduce actual poverty (which should be measured in absolute terms), but a goal for household equality.
• In forcing companies to publish the difference in salaries between men and women, the government has hit upon a terrible policy. Flexible working arrangements that offer fewer hours for less pay are being undermined. This legislation will discourage companies from employing women in junior positions in case they skew the results (undermining their ability to attract women for more senior positions). The unintended consequences will prove this to be counter-productive.

There are two even greater concerns that transcend the problems with any individual Bill. Firstly, how on earth does the government expect to pay for this? £4.2 billion on the Child overtly Bill; £655 million on the Improving Schools and Safeguarding Children Bill; £117 million on the Equality Bill; the list goes on. Accepting that the government is already trimming the edges of government in cognito, the fiddling needed to also cover these policies would put Madoff to shame. What will be cut?

The other concern is the fact that so much of these Bills are filled with trite nonsense. As Simon Jenkins points out in The Guardian:

What is "a mandatory job for every school-leaver unemployed for a year" or "a guarantee to local people of more power to keep their neighbourhood safe" or a "guarantee of a personal tutor for every parent" or an "enforceable entitlement to see a consultant"?

To sum up, Building Britain’s Future is full of bad, expensive polices that have no chance of working.