Fraser Nelson’s voodoo economics

The claim that the cuts are neither "deep" nor "harsh" does not bear scrutiny.

Spectator editor, Fraser Nelson, set sail for his summer holiday in Sweden yesterday with an extraordinary piece for his Coffee House blog. His article claims to show that the coalition's cuts are neither "deep" nor "harsh" and that they are nearly identical to those proposed by Alistair Darling. It could not be further from the truth.

Nelson's key conceit is to base all his figures on Total Managed Expenditure (TME), which include automatic stabilisers such as unemployment benefits and debt interest. In the long run, everyone should want these to come down but there is no easy way to do this in the short run while unemployment hovers around 7.7 per cent and debt is increasing.

A far better measure of the pace and scale of the cuts is to look at Departmental Expenditure Limits where the bulk of the cuts are taking place. This is the government's discretionary spending and includes a real terms squeeze for the education budget and crippling cuts for many departments such as the 25 per cent facing the Home Office or 27 per cent for local government spending. As we all know, this has resulted in cuts to Education Maintenance Allowances, police numbers, affordable housing and many other local services.

The Treasury's own figures show that the government is planning £95 billion of spending cuts between now and 2015-16. This pain has only just started with £22 billion planned in 2011-12 and much more to come in future years. The impact of these cuts is profound. The Chartered Institute for Personnel and Development have said that the cuts will result in 1.6 million lost jobs across the economy. While it is true that Alistair Darling's cuts would have caused plenty of their own pain Labour was proposing a more modest £51 billion by 2014-15. In other words, for every £8 of coalition cuts, Labour would have cut £5.

Nelson goes on to claim that Osborne's cuts are less severe than those of Denis Healey in the 1970s. Again, he does this using TME figures rather than looking at DELs. Thankfully, the independent Institute for Fiscal Studies made precisely this distinction in their post-Budget analysis. The graph below shows what public spending looks like when those non-discretionary items are taken out.


The IFS analysis shows in their own words the "longest, and deepest sustained, period of cuts to public service spending since (at least) WW2"". It is also worth noting that under Denis Healey in 1977-78, inflation was rampant and volatile meaning that the public spending settlement (which was set in cash terms) could result in either a real terms cut or rise depending on the level of inflation that year.

In a later point, Nelson seeks to show that Britain's fiscal consolidation is small by comparison to a range of international comparisons. His examples simply don't stack up since they are either from mid-1990s when small open economies like Sweden, Finland and Ireland were able to offset their spending cuts with export-led growth due to global buoyant demand. Or they are countries from the box marked "basket case". Does even Nelson really want us to emulate Ireland or Greece in cutting until the pips squeak, the eyes bulge, and the country stands on the brink of economic collapse?

Nelson goes on to claim that inflation is the "real villain". Again, there is a contrast with the 1970s. At that time, there was a wage-price spiral meaning that - although bad for the macroeconomy and something we should be avoided at all costs - living standards were keeping pace with inflation. This time around, as Nelson's own graph shows, the squeeze on living standards is due primarily to stagnant wages. Indeed, the squeeze long precedes 2010 and - according to research released by the Resolution Foundation this week - goes back as far as 2003.

Core inflation - stripping out the impact of food and energy prices - actually dropped from 3.3 per cent to 2.8 per cent last month. And economists such as Gavyn Davies as well as politicians like Vince Cable are starting to call for additional quantitative easing. Nelson doesn't call explicitly for an interest rate hike to halt inflation but it would be madness if he did so. As Adam Posen of the Bank of England has said:

"The recent consumer price inflation rates above 4 per cent result from this year's value added tax increase and the recent energy price shock. Removing those factors, UK inflation has averaged 1.5 per cent over the past year - including any remaining effects of sterling's past decline. Of course, higher taxes and energy prices shrink British real incomes, but the monetary policy committee was right not to respond to them, and should not do so now."

As an adherent of "voodoo economics", Nelson, in his sixth point, seeks to lay blame for our economic woes on the 50p rate of tax, which affects only those earning over £12,500 per month. The experience of his favourite holiday destination, Sweden, alongside Denmark - where the tax take has risen since the 1960s with no impact on growth - shows that there is little evidence for this theory as Lane Kenworthy has shown in an exhaustive blog on the topic.

Today's growth figures are a wake up call and show that growth has been anaemic since September. Indeed, 2011 growth is likely to come in at less than half the level originally predicted by the Office of Budget Responsibility in June 2010. Fraser Nelson and his friend's remedy of tax cuts, more spending cuts, and interest rate hikes are a recipe from the discredited text books of the 1980s. Only a sensible approach which makes proper use of the available data can lead us out of this mess.

Will Straw is Associate Director at IPPR

Will Straw is Associate Director at IPPR.

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.