For a while, a graph called the ‘jaws of death’ did the rounds. It showed how social care expenditure was increasing at such a rate that it threatened to constitute more than the whole of local government expenditure by 2020. Well, yesterday the Office for Budget Responsibility produced a graph that may well come to replace it. Let’s call it the ‘graph of doom’:
Essentially, the graph shows that the size of the state will be at the lowest level in 80 years. The last time it was at anywhere near this level in the late 1990s, the Conservative Government of the day was kicked out in a landslide election. This change is a consequence of the Conservative approach to austerity which relies on at least 80 percent of deficit reduction coming through public expenditure cuts.
This is the most significant re-shaping of the British state since Margaret Thatcher came into power in the late 1970s. Yet, there has been next to zero public debate about what this smaller state might mean, whether it’s desirable, and whether this is the democratic choice that we would make when given a range of options. The debate instead has been about whether we should undertake a process of austerity or not. The left of British politics, where one might expect to find the most articulate defence of the public value of state investment and expenditure, has instead locked itself into a battle against austerity. That has given George Osborne his opportunity.
The arguments against austerity have run from the impact on those employed by the state, those who rely on state support, and a frantic grab for any passing economic theory that argues that deficits don’t matter or that there are sustainable ways of running very high deficits for a long period of time.
You can find an economic theory for everything including the ‘deficit doesn’t matter’ – if you like such things then I highly recommend modern monetary theory. There are also the ‘accounting identities’ which sound technical but are actually a simple model of the economy as two pumps – net private savings and net Government expenditure – which must add up to the level of a third pump, net exports (or net current balance). In this explanation, if you have high net savings and you try to reduce the deficit you will fail and probably plunge the economy deeper into recession. This may be true up to a point (and George Osborne could have done with having this formula to hand in 2010) but the reality is that economies are dynamic social systems instead of factory machines. These simplicities give some rough guide but no more – feedback loops, financial complexity (animal spirits), human behaviour and dynamic interaction are far too complex for such simplicities to be more than a rough guide. Just ask Japan which seems stuck in perpetual deflation despite applying ‘accounting identity’ theory. The irony is that many of the left have spent so much time unpicking the application of the rationalistic economic models of the right over the last few decades yet now resort to precisely the same economistic approach.
But the reality is that austerity of some form on some discrete timetable was absolutely necessary. It should have been focused on recurrent spending rather than capital spending (in fact, this latter should have been maintained). The choices are about when (as long as it’s relatively soon), how and on whom the burden falls. By failing to accept this, the first major battle over our national future was basically conceded. As the economy has recovered, the debate has moved onto this wider territory but it may be too late. The irony is that George Osborne has used austerity to downsize the state because there were too few credible alternatives and the debate was being fought on the wrong ground.
What is most interesting is that the nature of the state we now have is even more focused on welfare systems (and debt interest) such as pensions, international development (a welfare budget to a certain extent) and the NHS than previously. So instead of focusing on investment in infrastructure, science, housing, and skills – all of which would contribute to future growth and economic stability – we are more focused on basic resources and services. There is room for both but then you need to make the case for paying for them because they are valuable. And this is the debate that we quite simply haven’t had. The nature, purpose and focus of public expenditure should drive resources including a debate about how we are taxed and by how much. This is the real war rather than the phoney war that’s been played out over the last few years.
So the next election will be about who is the most successful economic manager (judged either by national or personal prosperity or a mixture of the two) rather than what it is that we seek and need from our Government and how it should go about it (e.g. by devolving power and resources). We have made decisions about the fundamental character of our society without ever having realised it.
Maybe the ‘graph of doom’ will shake up the debate. Whatever the outcome, a healthy democracy needs to make decisions about its long-term future in an honest and open way. The left has been complicit in allowing a smokescreen to be erected. More broadly, we all have a stake in this. Let’s debate it openly and honestly and have an election that is about what counts – real choices about our collective future.
Anthony Painter is the RSA’s Director of Institutional Reform. You can follow him on twitter @AnthonyPainter