Labour and the public finances

The guilty men

The bad economic news which surrounded the budget yesterday seems to have given Ed Balls the confidence to tour the studios telling all and sundry that he has been ‘vindicated’. What’s worse, some intelligent people appear to be falling for this obvious rubbish.

To remember just how obvious and just how rubbish this is I’d refer to this previous blogpost. But I’d also refer you to this, an election briefing from 2010 from the Institute for Fiscal Studies. The whole thing is worth a read but I’ll quote the summary in full…

Total public spending is forecast to be 48.1% of national income in 2010−11, up by 8.2% of national income from the 39.9% Labour inherited from the Conservatives. This would be the highest level of public spending as a share of national income since 1982−83.

• Most industrial countries have increased public spending as a share of national income since 1997. But between 1997 and 2007 – prior to the financial crisis – the UK had the 2nd largest increase in spending as a share of national income out of 28 industrial countries for which we have comparable data. Over the period from 1997 to 2010 – including the crisis – the UK had the largest increase. This moved the UK from having the 22nd largest proportion of national income spent publicly in 1997 to having the 6th largest proportion spent publicly in 2010.

• Spending on public services has increased by an average of 4.4% a year in real terms under Labour, significantly faster than the 0.7% a year average seen under the Conservatives from 1979 to 1997. This is largely due to increases in spending on the NHS, education and transport. Since 2000–01 public investment spending has increased particularly sharply and is now at levels not seen since the mid to late 1970s. Despite large increases in the generosity of benefits for lower income families with children and lower income pensioners social security spending has grown less quickly than it did under the Conservatives.

• Estimates from the Office for National Statistics suggest that public services have improved considerably over the period from 1997 to 2007 with measured outputs suggesting a one third increase in the quantity and quality of public services. But this increase in measured public service outputs is less than the increase in inputs over the same period; in other words productivity has fallen. The relative price of these inputs has also risen, so we find that the “bang for each buck” that we get from spending on public services (output per pound spent, adjusted for whole economy inflation) has fallen more than productivity.

• If the Government had managed to maintain the “bang for each buck” at the level it inherited in 1997, it would have been able to deliver the quantity and quality of public services it delivered in 2007 for £42.5 billion less. Alternatively, it could have improved the quality and quantity of public services by a further 16% for the same cost. But perhaps service quality has improved in ways not captured by the ONS’s measures. Or perhaps we were to bound to see diminishing returns to additional spending when it was increasing so rapidly. To the extent that additional spending boosts output fully only with a lag, we may not yet have seen the full benefit.

How can you say the people responsible for that have been ‘vindicated’?

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