The “end of austerity” – what happened last time?

20 June 2017

The post-Election debate continues to turn on the “end of austerity” and quite what that might mean. Last week I argued that the position of the public finances, coupled with the opportunities of new technology, mean that public sector reform must continue. This week I will quickly review what happened last time i.e. what happened to the rapid increases in public spending introduced by Tony Blair’s governments after 1999-00.

The Reform paper A Lost Decade? (2008) summarised the evidence. The information below is partly drawn from that paper.

Major spending increases

The years between 1999-00 and 2007-08 certainly saw an “end to austerity” at that time. Public spending rose by fully five percentage points of GDP, from 37.0 to 42.0. Total Managed Expenditure rose in real terms from £408 billion to £571 billion.

A “flash flood” of spending meant that resources were not well used

It was frequently commented at the time that the sheer scale of extra resources meant that they were not well used. The International Monetary Fund regularly made the point in its annual evaluation of the UK economy:

“Staff also questioned whether it would be possible to raise public spending as rapidly as currently envisaged without risking inefficiencies. Some spending increases were likely needed in areas such as health and transport where spending was low relative to historical and EU averages.  However the need for additional spending was less obvious in other areas such as education where spending was already comparable to international levels. Moreover, as noted in last year’s discussions, the sheer speed at which spending was being increased risked inefficiencies that a more gradual approach might have avoided” (2002 Article IV Consultation, Staff Report).

Spending without reform

The Government of the time argued that the spending increases would be accompanied by reforms to increase the efficiency of the public sector. In reality those reforms were slow to materialise. Sir Derek Wanless authored a report for the Treasury in 2002 which recommended major spending increases on the NHS. He  came to a telling conclusion five years later:

“What is clear is that thus far the additional funding has not produced the improvements in productivity assumed in the 2002 review – costs of providing health services have increased and there is patchy and conflicting evidence on the impact on productivity overall, including little information about community-based care” (Our future health secured? A review of NHS funding and performance, Kings Fund).

Martin Wolf may have had this is mind when writing his strong piece last Friday:

“What is needed is honesty: the country can choose to raise spending. But, if it wants to run a sound fiscal policy, this will mean substantially higher taxes …. That additional taxation also needs to be well targeted and designed. The extra money raised needs to be well spent, too. Otherwise, the effort would be a huge waste. That would be quite senseless.”

Borrowing £123 billion beyond target

The period ended with the financial crisis and the ballooning of deficit and debt. Even before that, however, the Treasury had arguably lost control of  UK borrowing.  For the years 2002-03 to 2006-06, HMT initially predicted that it would borrow £46 billion. It ended up borrowing £166.8 billion. At the very least, it was a classic example of “optimism bias”. (Full figures at the end of this Reform paper).

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The last question is whether the UK government has become so much better in its management of public spending in the last 15 years that a new “flash flood” of extra spending would be better used.  That will be covered in next week’s  blog.

Andrew Haldenby, Director, Reform

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