When their subject is dominating the general election debate
in the media and among ordinary citizens, what could a public management
academic possibly complain about?
Well, don’t get me wrong, I'm not bellyaching at all.
Democracy doing its job ought to be celebrated, even when the news for the
public services is hardly cheering.
But... (and you knew there’d be one...) it’s not at all clear yet
that the politicians and journalists are focusing on all the big issues of
public management that will really matter during the 2015-2020 parliament. Let’s
start with those cuts which will follow the general election, as soon as a
government is formed and its budget is prepared.
Here is this week’s chart to reflect upon.
The chart shows three key indicators of the state public
finances, all expressed as percentages of gross domestic product (GDP), which –
for all that it isn’t very satisfactory – is still the best single indicator that we have of the volume of value-adding
activity being produced in the British economy in a given year. To keep the numbers
simple, I've used the Guardian’s adjusted versions of Office of National
Statistics numbers. Although cash numbers may seem at first easier to understand, it makes sense to
show government finances as proportions of national economic activity because
that provides a coarse measure of the things available to be taxed. Those
percentages are marked on the vertical axis. The horizontal axis shows time.
The three indicators are traced all the way back to the year 1964-5, the first
year of Harold Wilson’s Labour government. The brown line at the top shows what
government spent each year, as a proportion of total economic activity. Next,
the blue one shows what government took in, by way of taxes. And finally the grey
line at the bottom shows what government spent on interest to service its
debts.
Fairly obviously, the size of the gap between the brown and
the blue lines is the deficit, and when government is not repaying its
accumulated debt, it matters that the distance between the two lines should
start to narrow.
There is good news, old news and bad news in this chart.
The grey line is the good news. Indeed, it is better news
than it looks. It is well known that the total British government debt,
excluding the costs of the bank bail outs, rose very sharply indeed from its
historic low in January 2008 when it stood at 35.5% of GDP to around 77% now
(at least on the measure used in the UK government accounts; it looks higher if
calculated on a basis used by the EU for comparing countries). So the fact that
the grey line, showing that cost as a proportion of economic activity of
servicing all that extra debt in our chart, has barely ticked up, is very good
news. It reflects the fact that British government has been and still is able
to borrow at very low interest rates. In the jargon, the “yields” that
government has had to pay to those who hold bonds issued by the UK Debt
Management office for the Treasury, been low since 2008. Ten year Treasury
bills are currently paying around 3%. This is because the markets still think that the British government is good for
its debts, at least in the long term. And since 2008, the government has moved
a lot of its debt from more expensive short term Treasury bills and replaced
them with cheaper to service longer term bonds.
That’s not to say that if the deficit failed to fall further
during the next parliament, so adding less to debt until we can start repaying
some of it, the grey line would necessarily rise sharply. Of course, further
borrowing at levels which the bond markets thought irresponsible would push it.
But since even the Labour opposition is proposing to reduce the deficit further
during the next parliament and get to a surplus at least on the current account
by 2019-20, outright irresponsibility is probably not going to be the fear on the bond
markets just yet. Indeed, the grey line suggests that if government thought it
good for the economy to undertake at least a few more capital projects on
infrastructure, the impact on the cost of servicing the debt incurred might be
manageable. After all, the chart shows that as a proportion of GDP, the grey
line behaved itself surprisingly well even during the 1960s when the Labour
government was still struggling to down wartime debt and during the early 1970s
when the Conservative government was facing horrible economic difficulties from
oil and coal threatening the integrity of the tax base.
Then the chart shows you old news. The brown line drops from
2010. That’s the effect of the cuts already made, which so far have affected
the headline numbers for local government and the police more than they have
the NHS, even though hospitals’ difficulties are all over the news right now.
The bad news, though, is that blue line in the middle. It
shows receipts from taxes, again as a proportion of GDP. I could have shown you all sorts of
projections of that blue line for the next few years, but I didn’t because I
haven’t much confidence in many of them. And the reason that I haven’t is that
I’m looking at how the line has behaved over the last few decades.
Why is it bad news? Well, because it’s boring. Very boring. It just doesn’t do a fat
lot. There’s nothing dramatic going on there. It has wobbled around between
around 32% of the value of national economic activity and 38% in a good year.
But hang on. Since 1964, there’s been plenty of drama in tax.
In the 1970s, income tax rates for top earners were extremely high. In fact,
they were at 83% for the very highest earners between under the Labour
governments between 1974 and 1979. One of the last acts of the Gordon Brown and Alistair Darling regime in
2009-2010 was to introduce an additional higher rate of 50%, which the
coalition cut to 45%. In 1976, even the basic rate was at 35%. In 1992, John
Major and Norman Lamont reduced the starting rate of income tax for the lowest
paid to 20% and in 1999, Tony Blair and Gordon Brown brought it down to 10%. In
the early 1970s, when VAT was first introduced to comply with European rules,
it was levied at a balmy 8%. It was under Margaret Thatcher and Geoffrey Howe
that it went up to 15%. The coalition raised it from 17.5% in 2010 up to its
present 20%. In the early 1970s under the Heath government, the standard rate
of corporation tax was what would now be regarded as a whopping 52%. It now
stands at 21%.
The bad news is this. For all the last fifty years’ of
efforts to move tax rates up and down in the hope either of taking more money
out of the economy with high rates or else of stimulating more economic
activity in the hope that low rates would bring in more receipts through
expanding the size of the tax base, receipts have never topped something close
to 38% of the value of annual national economic activity.
Put brutally, that is all the next government has to work
with, to pay for the public services that sustain civilisation, to service its
debts and (eventually) to start paying down the accumulated debt.
But – and here’s the rub – demand for a host of public
services will rise during the next parliament, putting big strains on the brown
line for expenditure. The current health crisis for which Accident and
Emergency services are only the canary in the coalmine is a clear indication
that the ageing of the population is pushing demand up much sooner than some
commentators had predicted. The gathering environmental problems being created
by global warming, ranging from higher rates of flooding through to coastal
erosion, are also creating new demands for public expenditure. The next
parliament will see significant numbers of people who have been on low and
modest incomes now retiring whose occupational pensions will be much smaller
than some recent cohorts of retirees have been able to enjoy, and whose ability
to supplement those pensions will be limited.
So are the politicians talking about this chart? Well, yes
and no. The Conservatives have said that they have no plans for tax rises. It
isn’t very clear just exactly what that means, but it’s a fair presumption that
they would like to avoid big increases in headline rates. So they will rely on
growth, not rates to expand receipts. Their first problem is that growth is
slowing.
Their second problem is that, if the British economy is back
on its usual cycle, the next parliament could well expect to preside over the
start of the next recession, even before the public finances have recovered
from the 2008 slump. Since the end of the second world war, if we define a
recession as two consecutive quarters of a year in which the value of national
economic activity as measured by GDP has shrunk, then the rhythm of recessions
looks like this. There were recessions in in 1956, 1961, 1973-4 and also 1975
which we should probably treat together as one recession, 1980-1981, 1990-91,
and 2008-9. Of course, misery of other kinds lasted long after each, such as
poor unemployment figures or high rates of negative equity in house values, but
these are just the years of falling GDP. So the spacing between the end of one
and the start of the next is six years, then twelve years, then five years,
then nine years, then seventeen years. The gap between 1991 and 2008 was
exceptional, and unlikely to repeated, not least because of the effects of the
2008 great recession itself on the world economy and on Britain’s. So realistically,
we should prepare for the possibility that the gap between that recession and
the next might more somewhere between eight and eleven years. That would put
the next one squarely in the lifetime of the government we are about the elect,
with some chance that it might at least fall toward the latter part of their
time in office. For our chart, this means that the current growth might not be sustained
long enough to keep the blue line from wilting and the brown one from perking
up dangerously.
Some Labour politicians have hinted that they think that
forty or even forty two per cent of GDP might be the sort of terrain they would
like to see for government expenditure. If they also mean to keep to their
plans for reducing the deficit and getting to a current account surplus by
2020, then Labour would need to get tax receipts up to and preferably above
that 38% which has been the best we have seen since the 1960s. The narrow band
in which blue line in the chart has moved and the reflections I’ve just offered
about the experience of fifty years of moving rates up and down suggests that
will be very, very difficult. That’s their first problem.
And Labour’s second problem? Well, it’s the same as the
Conservatives second problem – the likelihood of the next recession starting in
the next five years.
So what about those government surpluses then? Does the chart
show us anything about how to get one? Well, yes, it shows just one period of
absolute surplus in the last fifty years. That was in 2000-2001, before Gordon
Brown’s 2001 budget started increasing spending on public services to deal with
what the Labour government described as the decrepitude they found in 1997 but
were prevented from addressing before then by their promise to keep to
mid-1990s Conservative chancellor Ken Clarke’s spending plans for the first few
years of their time in office. Around the turn of the millennium and despite
the “dot com bust”, British GDP was growing by between 2% and 3% a year, but it
dipped a little from 2002. The chart above shows that at that time tax receipts
had been growing at a healthy clip since around 1994-5.
So can Labour just do all that all over again, then? Well, it’s
true that right now economic growth is back, albeit that it’s probably more fragile
than it looks. The chart shows that although tax receipts aren’t falling
catastrophically, and most recently they have perked up a bit more to the point
that in the very short term, some immediate targets might actually be met. But the longer term trend in tax receipts does not show them are not rising at
anything like the rate needed even to meet the coalition government’s aspirations
for reducing public sector net debt as a proportion of GDP to under seventy per
cent by the mid 2020s. Until very recently indeed recovery has been “tax poor”
for several reasons. Partly that’s down to widespread low earnings for many of
those in work. Partly it’s due to the coalition government’s decision to raise
the threshold before income tax gets levied to £10,000, which leaves many on
low wages paying little income tax. Some think it may also be due to some
expansion in the cash-in-hand economy, but it’s hard to be sure of that. So it
looks as though Labour’s hopes rest on some very rapid improvements in earnings
which by good luck (for example, with the pound’s behaviour on the foreign
exchange markets) don’t harm competitiveness.
But the other part that the chart makes rather too pointedly
(the point is downward facing and sharp in 2001) is that the last time we had a
surplus, it was not sustained. Labour in 2001 had to meet expectations for
better public services, especially in the NHS, on which Tony Blair then felt
compelled to promise to meet the European average in public spending as a
proportion of GDP. That could certainly happen again.
Moreover, after the election, it’s quite likely that the
present boom will subside. The first budget of the new government, announcing
the detail of the spending cuts, will depress demand and growth. If there is
political uncertainty – for example, if the next government is a minority one –
the markets will grow distinctly nervous. A Greek or Ukrainian crisis, Libya
falling to extremists or – heaven forfend – a standoff in the Baltic – will
certainly bring about a sharp downturn.
The American scholar of government, Francis Fukuyama, talks
of the challenge for countries reforming their systems of public management as
one of “getting to Denmark” - a symbol of a well-run country with the rule of law, political stability,
little corruption and competence in public services. For the government we’re
going to elect in May and which is supposed by law to last until 2020, the
challenge is not quite that. It’s getting to thirty eight. Oh... and staying
there for a good many years, even when the next recession arrives.
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