43 and 36 – Locking in the Smaller State: George Osborne’s ‘Summer Budget’

The general consensus is this is a “big” Budget with lots in it. It is, but unfortunately most commentators are missing the really big picture.

To be able to grasp what lies behind George Osborne’s ‘Summer Budget’ 2015 you need to remember just two numbers: 43 and 36.

43

Modern advanced economies usually spend between about one third and two thirds of GDP on public activities: public services, benefits, subsidies, etc. Most countries fall nearer the average, which for OECD countries in 2013 was 42% of GDP.

It is important to put that into historical perspective. At the start of the twentieth century advanced countries governments spent about 10% of GDP. Whatever their political institutions and histories, they have all ended up with what, by historic standards, is some form of ‘big government’. Of course, there are many differences between advanced countries, but they should not blind us to this broad, historic, pattern.

Britain’s average for the past 50 years has been about 43% of GDP. In the latest official data series, which only goes back to 1972 and up to 2016/17 the average is 42.7% (Public Expenditure Statistical Analysis 2014, HM Treasury).

So, on average the British state has ‘consumed’ the equivalent of about 43% of GDP over the past five decades. It’s swung about that average quite a lot – sometimes as high as nearly 50%, but rarely has it gone significantly below 40%.

There are complex reasons why an advanced, capitalist, democracy is likely to end up with a state sector of about the size it does – mainly to do with the fact that it needs the physical, legal, social and human infrastructure such ‘big government’ alone can provide.

36

Most of the commentary on George Osborne’s ‘Summer Budget’ is focused on how much it has changed since the last one he delivered in March 2015 – before the General Election.

True, he has ‘smoothed out’ the pace of welfare and spending cuts so that it is not quite as dramatic in the first two years as he proposed only a few months back. Many now think those more extreme cuts were purely to lock the Liberal Democrats and wrong-foot Labour before the Election.

What people are ignoring is that whilst the path and pace may be different the fundamental goal remains exactly the same – to reduce public expenditure to around 36% of GDP, a massive shift towards a permanently smaller government. The actual target in the ‘Summer Budget’ is 36.3% of GDP for both 2019-20 and 2020-21 (in March it was 36.0% for 2018-19 and 2019-20 so it has slipped a little).

Osborne’s aim is clearly to change the pattern of spending – on services and welfare – and the patterns of taxation in such a way as to ‘lock in’ any future government to a permanently smaller state. In his Budget speech he used the phrase “new settlement”:

“We should aim for a new settlement across the political spectrum where it is accepted that: 

  •  without sound public finances there is no economic security for working people,
  •  that those who suffer when governments run unsustainable deficits are not the richest but the poorest,
  •  and therefore in normal economic times governments should run an overall budget surplus, so our country is better prepared for whatever storms lie ahead.”

What this would actually do is lock-in the reductions in the size of the state in his so-called ‘long term economic plan’.

What is disturbing about this policy is that it is not spelt out explicitly – although the continuity in Osborne’s plans to try and get spending down to permanently lower levels is fairly obvious. Originally his target was a slightly more modest 40% of GDP, back in 2010, and when he was in Coalition with the Liberal Democrats, but that gradually evolved into the more ambitious target of 36% – a figure long advocated by various right-wing think tanks in the UK. But all this is hidden behind rhetorical devices about ‘balanced budgets’ and ‘fixing the roof’.

The real debate we should be having after this Budget is not about the pace or path of Mr Osborne’s plans, or the myriad of details, but where are we going in a more strategic sense as a country? Do we really want to live in a country with American welfare standards, for example? That is what Mr Osborne’s smaller state prospectus implies. The Chancellors vision, such as it is, is limited to the idea that all you have to do is shrink the state and ‘the markets’ will take care of the rest.

[also published on Manchester Policy Blogs]

 

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