Our fortnightly series continues.
Why rolling back the state failed
On the 15 March 1988, Nigel Lawson delivered one of the most dramatic Budgets in Britain’s post-war history.
He spoke for nearly two hours, batting away interruptions from an increasingly irate Left-wing opposition. A young Scottish Nationalist MP by the name of Alex Salmond was “named” and removed from the Chamber — but that was not the peak of the uproar. The crescendo came when Lawson unveiled the centre-piece of the Budget statement: a cut in the basic rate of income tax from 29 to 25 per cent and in the top rate from 60 to 40 per cent. The “grave disorder” that greeted the announcement compelled the Deputy Speaker to suspend proceedings.
The irony is that, 35 years later, it is the Right that is tormented by the memory. For tax-cutting Conservatives this was peak Thatcherism, a golden age that subsequent Tory leaders have struggled, and failed, to recapture.
Unless we can control the growth of spending the scope for tax cuts is limited. And not only tax cuts. A responsible government might also want to reduce the national debt. Or it might want to allocate more funds to capital investment — because inadequate, poorly maintained infrastructure is a form of national debt: a liability imposed on future generations. But despite winning some battles, small-state conservatives are losing the war. If they were winning, the debt burden wouldn’t have tripled since the millennium nor would the tax burden be on course to reach the highest level since the war.
So why has small-state conservatism failed as a political programme? To answer that question we need to look at main state-constraining strategies and why they have fallen short.
Unlike recession, there is no official definition of austerity. Indeed, governments that practice austerity are reluctant to even use the word. It appeared nowhere in George Osborne’s 2010 emergency Budget speech.
But what austerity normally amounts to is an attempt to reduce or eliminate the annual deficit, through top-down emergency measures to cut spending and raise revenues. Examples include public sector wage freezes top benefit cuts to tax rises. The intention isn’t just to limit or even reverse the growth of debt, but to also restore international confidence in a troubled economy.
That was certainly the case for Britain in 2010. Given the UK’s outsized exposure to the Global Financial Crisis and combined with the decline of North Sea Oil production, it was necessary for us to demonstrate our solvency as a nation — or face a Greek-style sovereign debt crisis. Hence the austerity policies of the Coalition Government.
These were far from being a complete failure. For a start, a UK sovereign debt crisis was avoided — in contrast to several of our European neighbours. There were minor ups-and-downs in debt and tax levels, but the overall pattern for the 2010s was one of stabilisation. Furthermore, the jobs-led recovery that followed the “Great Recession” wrong-footed the Left-wing pundits who’d predicted mass unemployment.
However, the fiscal policy of George Osborne and his successors also demonstrate the limitations of austerity as a means of shrinking the state over the long-term. While wage freezes and the like can indeed hold down state spending in the short-term, pressures build up in the form of strike action and recruitment problems. Therefore, when fiscal disciplines are relaxed, there’s a rebound effect as state spending goes up to fund long-suppressed wage rises and recruitment drives.
Then there’s the risk of political backlash. For instance, after the comparative parsimony of the Thatcher and Major years, the electorate gave New Labour a massive majority and three terms in office to increase the flow of resources into the public sector. This is what started the process that has tripled UK debt levels since the millennium.
For practical and political reasons, austerity is almost always a temporary measure. The only exception is when it is imposed on a country that is so indebted that its creditors can dictate terms — as in the case of Greece. But, of course, such a state of helplessness is what we’re fighting to avoid.
There’s a longer-lasting alternative to austerity. Instead of government restricting the flow of funding to the public sector as a whole, it could stop funding some public services altogether. This might mean the complete withdrawal of a public service — for instance, the closure of a public library; or it might the introduction of charges — for instance, for a council car park; or the level of provision might be drastically reduced — as with the thinning-out of public transport networks.
Abandonment does have some advantages over austerity. It recognises a fundamental truth, which is that government can’t do everything. Furthermore, permanent reductions can be made to headcount and therefore payroll spend. There’s also the argument that it’s better to sacrifice the lowest priority services than to keep the whole of the public sector on reduced rations.
But, of course, closing public services is electorally unpopular. Therefore, instead of making tough, but strategic, decisions, politicians go for the soft targets instead. The classic example is capital spending on infrastructure, which ranks low on voter priorities, despite its long-term importance.
The result of chronic under-investment is that school buildings slowly (and then quickly) decay; hospitals don’t get the medical equipment they need to speed up waiting lists; and major cities like Leeds become congested because they don’t have the mass transit systems that their continental counterparts enjoy. By the time that the impact on public and private sector productivity becomes unmistakable, the politicians who took the easy way out are normally long gone.
Instead of cuts to spending on real needs, an obviously better alternative is to cut spending on things that are not needed. Examples include pointless bureaucracy, unwanted red tape, flawed procurement processes and outright fraud at the taxpayer’s expense.
So who could possibly object to minimising waste? Well, in any functioning state that hasn’t been utterly debased by corruption, the answer is no one.
That’s why efficiency drives are a near constant feature of government activity. One of the most significant examples in recent British history was the Gershon Efficiency Review conducted by Sir Peter Gershon at the behest of Tony Blair and Gordon Brown. The review identified £20 billion in savings from civil service reorganisation — though some outcomes were criticised as coming at the expense of government expertise.
The war against waste has continued, from the 2012 Civil Service Reform Plan lead by Francis Maude to the Efficiency and Value for Money Committee announced by Rishi Sunak, when he was still Chancellor. (The distinction between “efficacy” and “value for money” is unclear, but it does underline Whitehall tendency towards duplication.)
The war against waste is, like painting the Forth Bridge, a never-ending process. All organisations, including government, are subject to entropic processes of accumulating dysfunction. But while this means that conventional efficiency drives essential, there’s little evidence that they can dramatically shrink the state.
The low hanging fruit of efficiency were picked a long-time ago, starting with Northcote-Trevelyan reforms to the Victorian civil service. While it certainly has many failings and there is waste in the system, the modern British state is neither kleptocratically corrupt nor helplessly incompetent. Our taxes are, on the whole, used for their intended purpose. Whether it’s paying nurses’ wages or purchasing jets for the Royal Air Force, most of the money gets through and the fraction that ends up paying for things that obviously serve no purpose and meet no need, is small by comparison.
In the final chapter of this series, we’ll explore whether a deeper form of structural change could achieve more, but in term of established methods we have to recognise that along with austerity and abandonment, efficiency has its limits.
Starving the beast
There is fourth strategy for shrinking the state. It has been a much bigger influence on American than British conservatives, but it’s worth mentioning here if only for the salutary lesson of its failure.
It is known colloquially as “starving the beast” — the beast being the state. Instead of worrying about how to reduce government expenditure, the idea is that small-state conservatives should focus on reducing government revenue by cutting taxes. The logic is that the state can’t spend money that it doesn’t have — and so will have no choice but to tighten its belt. As Alan Greenspan said in 1978: “the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available.”
Except this hasn’t worked. Pressure groups like Americans for Tax Reform may have persuaded Republican law makers to favour tax cuts and never vote for tax hikes, but the American state continues to balloon in size.
The fatal flaw in the strategy is that taxes aren’t the only source of government funding — the state can also borrow the money it spends. America’s national debt stood at well under 40 per cent of GDP in 1978, but grew steadily through the Reagan years before exploding the wake of the Global Financial Crisis. In the course of the last decade, it smashed through 100 per cent barrier and continues to rise.
The beast, therefore, is as bloated as ever.
So if every approach to containing the expansion of the state hasn’t worked, then what about trying to grow the economy even faster?
Tomorrow we’ll look at the sunlit uplands of the going for growth strategy.