Wednesday, 7 January 2015

Will UK spending cuts really return us to the 1930s?

Labour leader Ed Miliband's (above) recent claim that the Conservatives want to return the UK to '1930s levels of spending' bears a closer look - especially if you're an economic historian.

The phrase is obviously designed to strike fear into voters' hearts, summoning up visions of the Poor Law, the means test, of starving children and out-of-work labourers scrabbling on spoil tips for lumps of coal. And there's a little bit of truth in the claim - if you know how to count, and you know where to look.

First things first: spending will not be returning to 1930s levels. It's just not true. Government consumption during most of the 1930s (until rearmament began to skew the figures) might serve as a rough approximation of 'government service spending'. And it ran at about 10% of GDP then, as compared to the 15% that it's projected to hit by 2020. Chancellor George Osborne's plans would shove Britain back to spending about 35% of GDP by that time - a massive fall, to be sure, from the present 41% - but the same figure was approximately 30% even at the peak of pre-war spending in 1939. And about half that was spent on debt repayments from the First World War, meaning that 16% was left for public services. By contrast, the Conservatives suggest that this figure might be 20% in 2020.

So it's towards the 1930s, but not into the 1930s. So will we be all right, even with such swingeing cuts? Well, no, actually. Things are going to feel very, very grim indeed. The bulk of the cuts are still to come if the coalition (or anything resembling it) returns to power. Now if you're reading this in Scotland or Northern Ireland, you'll be relatively sheltered, because of the Barnett Formula protecting the elements of Scottish spending that will still not be raised in that country after the Smith Commission's recommendations are put into effect. And the recent financial deal in Northern Ireland means that public spending there will still be much more generous there than in England and Wales. But if you're outside the Six Counties and you're south of Berwick and Carlise, we're very much afraid that you're in the soup.

The respected Institute for Fiscal Studies says that the spending reductions of 2015-20 will be 'colossal' - by far the greatest attempted since the early 1920s, and possibly the largest in modern history if they are actually carried out. Non-ringfenced departments will lose half their budgets. It's as simple as that. The Conservatives won't even rule out cuts to the schools budget, which has been protected up to now. At a time when a massive birth bulge is hitting the schools, you should prepare for massive, massive class sizes if you've got a young child. Now any alternative Labour-led administration will go a bit easier, releasing perhaps £25bn more for public spending by the end of the Parliament - because they don't want to create an actual surplus, and they're not promising any absurd and unfunded tax cuts. But things won't be easy, even if Ed Balls is in the Treasury. He's already been forced to announce that he won't ease up on public sector pay, and there'll be cuts aplenty whoever's in No. 11 Downing Street.

There's a structural reason this'll all feel so grim, and you can see it today in the burgeoning crisis engulfing Britain's A&E departments. It's because our ageing society is about to age a lot more steeply, meaning that social care at home is becoming a lot more important at a time when it is taking the brunt of spending reductions. And when the provision of residential care might die out, too, on these figures. What will all these elderly folk do, when they fall sick, and when their relatives can't look after them? Hit the hospitals.

So the answer to the question is: no, we won't be returning to the 1930s' absolute or proportional levels of spending on public services. But things will feel bad. If you work in, or have to use, any of the services threatened - the police, the fire services, public housing, universities, research, local transport, the courts, social work and family support, local authority elderly care - you might just find that large chunks of them quite simply no longer exist. And that the NHS and schools, although to some extent protected, feel like they are operating at the very edge of their capacity. If you're in your 40s and 50s, the best advice is this: start saving now, and save as much as you can, because you're going to need it. It is a dark and doleful prospect - but one not really helped or illuminated by misleading references to the 1930s.