It makes no economic sense to keep shrinking the state without changing what the state is meant to do.


Since Chancellor
Hunt cancelled his predecessor’s cancelling of the rise in
corporation tax and postponed indefinitely the cut in income taxes,
but did not cancel the cancellation of the rise in national insurance
contributions, there has been much talk of Austerity 2.0. I’m not
sure I like the label Austerity 2.0 as a description of possible
future public spending cuts. The label austerity for the cuts after
2010 made some sense to me because it was about cutting public
spending at just the wrong time in the economic cycle. It ignored
everything we learnt from The
General Theory
that is now embodied in state of the
art macroeconomics. It didn’t just make users of public services
worse off, but it made
everyone worse off
by reducing national income. Some
of that income loss was probably permanent.

This will not be the
case for any spending cuts announced in the Autumn Statement, because we are at a
different point in the business cycle. It may not feel like an
economic boom, but the Bank of England is raising interest rates
because it thinks there is excess demand in the labour market. To a
first approximation the more public spending is cut, the less the
Bank needs to raise rates. So spending cuts need not reduce
everyone’s income, as they did from 2010 onwards. In that sense
it’s not austerity 2.0, but just cuts in public spending.

There is another
crucial difference between any public spending cuts announced in the
Autumn Statement and what happened after 2010, and that is the state
of public services and the extent of poverty. Because of what
happened from 2010 onwards, plus inflation squeezing recent budgets
set in nominal terms, plus public pay rising a lot less than private
pay, most public services are in a critical state right now. As I
have said before, talk of further cuts is an abomination. We should
instead be talking about spending increases.

Take the largest
component of public services, health. The NHS and social care
desperately need more money to reduce record waiting times for
ambulances and routine operations, and that money has to include
paying more to nurses, doctors and care workers to stop staff
leaving. We also should allocate more money to start training the
number of nurses and doctors we need. Making cuts to planned health
spending is unthinkable for any government that cares about the
welfare of its citizens. Talk of efficiency savings is just another
way of making cuts.

But health is not
unusual. Delays in the courts are at record levels, and the police
are solving
less crimes
. Many/most schools
will have to cut back on staff next year because they have had no
money to pay higher energy bills. Cutting public investment and
maintenance just creates problems for the future: the Institute for
Government estimates
maintenance backlogs for Schools, the NHS, courts and prisons stands
at £23.7bn.
Equally cutting welfare
when real incomes are squeezed by high food
and energy prices and real wages are falling is also unthinkable for
any decent government.

It seems fashionable
for many in the media to say that public spending cuts are
inevitable. Not only do statements like this show how completely out
of touch those making them are with what is happening to public
services, but it is also a highly partisan proposition. But just as
important, the idea that there is no alternative is just false. There
is a clear alternative, which is to raise taxes.

We are so used in
the party political arena to debates about more or less public
spending that there is a danger of forgetting some basic economics.
With goods produced by the private sector, we think it obvious and
beneficial that the amount provided reflects the preferences of those
buying. If I asked why a certain percentage of total consumption was
on food and drink, while another percentage was for clothing, the
obvious and correct answer is that those percentages reflect the
average preferences of UK consumers.

However people also
have preferences over how much health provision they want, and how
much education or law and order. If the state is doing its job
properly, it will allocate spending over the public services to
reflect those preferences and needs, bearing in mind costs (paid for
through taxes) and available resources. We may be sceptical that the
political process is capable of doing that, but what evidence we have
that broadly it does. Take health for example. As people have become
wealthier and are living longer, and as what medicine can do has
improved, the amount spent on health has steadily increased in most
OECD countries, even though the role of the state in health provision
varies widely among those countries.

We can see this
problem clearly when there exists both state and private provision of
the same service. Here is the ratio of spending per pupil in ‘public’
schools compared to state schools since 2003: source

the preferences for a good education for their children so very
different between those who use state schools and those who don’t? If
we discount that possibility, then this chart suggests those using
state schools are currently not getting the level of education that
their parents would be willing to pay for through taxes. More
that those people who want higher taxes and public spending
far exceed those who want less of both.

There is a perfectly
legitimate argument about whether certain services should be provided
by the state or the private sector. The debate over the size of the
state should fundamentally be about what the state does. But once the
decisions about who provides these services are made, then those
services provided by the state should be at a level to reflect the
preferences and needs of the state’s citizens. That implies clear
limits to how much or little is spent on the services the public
sector provides. If spending is below that lower limit, then the government is
failing in its duty to provide the services it is required to

With people dying in
ambulances while queuing up at A&E, with victims of violent
crimes waiting
over a year
before cases come to trial, with
of school children crying from hunger, it is
clear we are well below acceptable levels of provision of what the
state provides today. To the extent this is a political statement, it
is about government failure rather than the size of the state. [1]

Like many of our
current problems, this government failure stems from the
Cameron/Osborne period. They remembered how Thatcher had reduced the
role of the state, and wanted to do the same. But a lot of what
Thatcher did to reduce the role of the state involved transferring
tasks from the public to the private sector, like provision of energy
and water. Cameron/Osborne did very little of this, but instead just
reduced the amount of money available for existing state provision.
It is as if Thatcher, rather than privatising the water industry, had
just rationed how much water people are allowed to have each day.

The same point
applies to those who say that the share of government spending
(whether on public services or redistribution, including from young
to old) or the share of taxes in GDP has to be less than some
arbitrary number, or that a growing share is somehow indicative of
excessive public spending. If we are talking about public services
this is equivalent to saying that households should only be spending
some arbitrary amount on eating out as a share of total income. The
reality is that over time as incomes rise people want to spend a
higher proportion of their income on eating out, and as incomes and
life expectancy rises and medicine improves [2] they also want to
spend more as a share of national income on their health. As health
is provided by the state, the only way they can do that is through
higher public spending funded by higher taxes.

A favourite phrase
that journalists use is that UK voters want to pay American levels of
tax but want European levels of public services. But this comparison
makes no sense, because most health in the US is provided privately.
The reality is that UK taxes are well
that of most European countries. The reason for
this is that since 2010 Conservative governments have believed they
can get away with providing either very poor or downright dangerous
levels of public services because they are obsessed with low taxes.
[3] Any sensible discussion around the Chancellor’s Autumn
Statement, and future budgets, would be about what taxes should be
raised to restore our public services to a reasonable level..

[1] If you think the
state should pay but some services should be provided by the private
sector, which seems close to the current government view, then you
have to accept the quid pro quo that this option will be more
expensive for the state, because private companies need to make a
profit and this is not normally offset (if offset at all) by greater
efficiency. Of course in health this privatisation of provision
together with inadequate funding may be a prelude to moving to an
insurance based system. To say such a strategy is dishonest is the
least of its problems. Rather more serious is that it kills people.

[2] Unfortunately
the pandemic means we may need to add ‘as new diseases emerge’ to
that list. A point that is hardly ever made is that if Covid becomes
endemic then we need a step up in the share of health spending to
GDP, otherwise other health services are bound to deteriorate.

[3] Thatcher was able to reduce taxes in part by not investing North Sea Oil revenues and selling public