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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
Rachel Reeves is stuck between two insufferable abstract nouns: profligacy and austerity. The chancellor stands accused by those to her right of overborrowing, imperilling the nation’s creditworthiness. She simultaneously stands accused by the left of underspending and imperilling the nation’s citizens. Such is a politician’s lot.
While both claims are exaggerated, the government appears to be more politically exercised by the austerity than the profligacy one, given its association with the Cameron-Osborne Conservative-led government of 2010. At last week’s Spending Review, accusations of austerity were variously described as “ridiculous” and “garbage”.
Economists agreed. Mirroring the technical definition of recession, austerity is typically defined as any sustained contraction in government spending. During the austerity era of George Osborne’s chancellorship, real departmental spending fell by over 2 per cent per year. But this month’s Spending Review foresees spending increases of over 2 per cent per year across this parliament. Austerity, The Sequel this is not.
Except, that is, if you are the public. A recent survey by More in Common found a majority believed either that the UK was entering austerity or that it had never left it. Maybe those attitudes will now change. Or maybe the public have a better understanding of the real meaning of austerity than either economists or politicians.
Perceptions of austerity are better captured by the level of public spending than its change. Measured relative to some benchmarks, it is the adequacy of public services that shapes someone’s experience of them. If that benchmark is public services today, then outside of health, education and defence, austerity beckons — spending in the other parts of the state will be more than 5 per cent lower by the next election.
For many, however, a more probable benchmark is likely be their experience of service levels in the past. Relative to 2010, every government department’s spending, except health, is at a materially lower level and is set to remain so. By 2029, that loss will be 5 per cent for education, 15 per cent for criminal justice and prisons, and 30 per cent for welfare and pensions. Perhaps most visibly, the loss for local government will be 50 per cent. So Austerity, The Era will, for many, be a reality of day to day life.
No one doubts the postwar period was austere for UK citizens. Yet it would have failed the politician’s and technician’s test of austerity. Beyond defence, government spending rose in real terms every year between 1945 and 1950. But what mattered, then as now, was the lower level of public services relative to an earlier (prewar or pre-austerity) benchmark.
This chancellor’s preferred noun for the years ahead is not “austerity” but “renewal”. They are not necessarily antonyms: postwar austerity coincided with the largest renewal of the state in a century. This Spending Review detailed an extra £100bn in public investment. At approaching 1 per cent of GDP annually, this is meaningful in scale and was allocated creatively across sectors, regions and nations.
But context is all. The UK’s capital stock on a per capita basis is around a third smaller than competitor countries — a gap of two-thirds of annual GDP, or £2tn. This is 20 times the Spending Review top-up. Even with the top-up, other countries’ investment rates will still be above the UK’s, so the capital gap will continue rising. All else being equal, this means the UK’s relative growth prospects will continue to fall.
And little in the Spending Review besides public investment suggested significant state renewal. Government spending and the tax take as a share of national income will end this parliament as they began. Having ratcheted higher largely by accident, it is astonishing there is so little political debate or analysis on whether a state of this size is sensible — nor of its trajectory.
Renewal could come from changes to how the public sector delivers. The Spending Review forecasts £14bn of efficiency savings by 2030 — a figure criticised as implausibly large. The question should be why it is so tepidly small. On current projections, public sector productivity will be no higher in 2030 than 2020 — a lost decade for public sector reform.
None of this offers grounds for optimism about imminent economic renewal. Independent forecasters have been lowering UK growth projections for a year. The Office for Budget Responsibility is now such an outlier that their forecasts seem likely to be revised down too. Even over-optimistic OBR projections suggest that living standards among the poorest half of the population are set for a second lost decade.
Taken together, then, the Spending Review suggests a decade of austere public services, a largely unreformed state and no rise in living standards. None of this fits the dictionary definition of renewal. Nor does it match the postwar model. At the ballot box in 2029, will marginal gains and managerial competence be a match for lofty promises of reform (with a big and small R) and mercurial populism?
Provided ministers act now, this need not be the choice facing voters. But that will require renewal on the scale and ambition of the postwar Attlee government — radical reform to health and welfare, rewriting Byzantine tax and regulatory codes, reconstruction of the education and skills system, full-fat not semi-skimmed devolution. Without all this, there is little reason to think renewal will replace austerity as the public’s noun of choice.
