Controlling public spending

John Redwood MP recalls the Thatcher years and draws lessons for the benefit of the Coalition

by Sir John Redwood MP on 9 May 2013 16:01

The last time a government had to control the excess spending and borrowing inherited from its Labour predecessor was 1979.

I have been reading Mr. Moore’s new official biography of Margaret Thatcher. He guides us through the received wisdom and the well-known press cuttings and literature. In the case of her private life he does shine new light with access to the fascinating family letters, especially to her sister.

When it comes to the first couple of years fighting the deficit and excess spending he is less sure of foot. The fascinating thing was that despite all the preparation in opposition to come in and control spending from day one, the first two years saw a huge increase in public spending. This “fiscal stimulus” did not rush us out of recession, nor did it make the government popular.

I had been one of the two external advisers to the extensive policy group work done on public spending under Keith Joseph’s chairmanship in opposition. We had been through the published “books” with a fine toothcomb, and knew how the incoming government should get to grips with runaway spending.

Margaret had taken a strong personal interest in our work, as we were regularly told. Our papers were often called in for pulping, as she was understandably afraid that the detailed plans would leak, even though they were in line with the regular public statements about the need to curb spending.

Yet in the first year the government took cash spending up from £75 bn (General Government expenditure) to £90 bn, an increase of 20 percent, and in the second year up to £108.6bn, a further increase of 20.6 percent. The total increase over the two years was 44.8 percent (Red Book p.120, 1997-8).

Public sector inflation was rapid, and a lot of the increase went on higher wages. It was nonetheless a real increase of 5.2 percent as scored in an understated way by the Treasury at a time of stories of massive public sector cuts. Actual inflation was 29.8 percent, so public spending went up by 15 percent more than the GDP deflator measure of inflation (Red Book p.120).

So why did this happen? I think the main reason was the official civil service presented everything to Ministers in so called ‘real terms’. These figures concealed the huge cash increases in spending going on.

I called John Hoskyns (Policy Adviser) at No. 10 as soon as I saw some cash figures that revealed what was really going on. When I showed them to him he expressed surprise at the scale of the increases, as all the government debate was couched in terms of cuts and how many cuts the system could take. It was only  when Ministers and their advisers started to demand and to use  cash figures that the true scope of the spending control problem became clear to them.

The Coalition has put up spending by much less than the Thatcher government did in its first two years. It too, however, has tended to look at so called real figures instead of cash figures.  Where the Thatcher government increased spending by 44 percent, the Coalition increased current public spending by just 7.8 percent in cash terms, and continued with most of Labour’s capital cuts.

The Coalition has said it is cutting spending in real terms; yet overall current spending rose a little according to official figures. The rest of us have to budget in cash. Our pay does not go up to allow for full inflation. Indeed, the best way to budget in government if you want to bring the deficit down its to ask how many twenty pound notes each item costs.

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