The myth of government cuts

At an Adam Smith Institute dinner with Lib Dem MP (and former Chief Secretary to the Treasury) David Laws earlier in the week, the conversation turned – as it does so often at such events – to the speed of the 'cuts' in government spending. Without resorting to Google there was no way to resolve the argument, but next morning a City economist friend of mine gave me the actual figures.

It turns out there haven't been any 'cuts'.

Here is what the most up-to-date figures show. Total government spending (or as economists put it, general government expenditure on goods and services) in the April-June quarter of 2011 was 3.8% higher than in the same quarter of 2010. That's in straight cash terms (current prices). If we adjust for the effects of inflation (constant prices), the rise over the year was 1.3%.

Looking at Whitehall, and taking just the most recent month for which we have figures, central government spending (ANLP in the jargon) for August 2011 was a remarkable 7.2% higher than a year earlier.

In other words, despite all the howls about austerity, government spending is still growing, and growing fast, in both cash terms and real terms. True, some capital projects are being cut: but not enough to bring down the total amount that government spends.

With tax receipts stuttering because business is so flat, the government will struggle to get its borrowing down and hit is deficit-reduction targets. The problem with that is that foreign investors may come to the conclusion that for all the UK's fine talk, it cannot actually get its books to balance. If investors get the jitters, or the rating agencies downgrade the UK's creditworthiness even a fraction, the government could find itself having to pay significantly higher rates of interest on its massive borrowings. And that would make it even harder to balance the books.

Sometime soon, we really need to grit our teeth – end the bluster, and make real cuts in public spending.

[Update: As some commenters have pointed out, the initial current and constant prices figures for government spending were muddled. This is now fixed, thanks to all who pointed this out – ed.]