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Osborne's plan to permanently shrink the state is not necessary

The Chancellor's ideological cuts are but one route to sound public finances. Alternatives, centred around investment, are available.

George Osborne and Danny Alexander leave the Treasury for the House of Commons yesterday. Photograph: Getty Images.

Yesterday, George Osborne’s neoconservative plans were laid bare. Hidden amid all the other numbers, the Treasury announced a further year of austerity spending for 2018/19: the ninth in a row, if you’re still counting. But this Autumn Statement was different, because it was the first where Osborne called for a permanent, structural shrinking of the state.

Until now, each fiscal announcement since 2009 has sought to return the public finances to roughly where they were before the crash. Now, out of choice, the Chancellor is proposing that public spending should fall, as a share of national income, to far below its pre-crisis level - and indeed well below the trend since World War II. 

Back in 2007, expenditure stood at 40.5 per cent of national income. It increased rapidly to 47 per cent by 2009, mainly due to the economy shrinking, rather than rising spending. Ever since, the Treasury has been clawing its way back towards Labour’s level of spending and in March the plan was to reach the pre-crisis benchmark by 2017. In the Autumn Statement everything changed and without any announcement the Chancellor pencilled in a cut to 38 per cent of GDP in 2018.

In times past, when spending slipped this low it was because the economy was roaring. For example in the late 1990s, Gordon Brown and Tony Blair were caught off guard, with inherited Conservative spending plans and a booming economy. This time is different; the economic projections are far from impressive and the strain of shrinking the state is to be borne by spending restraint alone.

Turning to the detail, in 2016 and 2017 the plan is 'more of the same': total real spending is to fall at the same pace as from 2011 to 2015 (around half a per cent a year). Then, on top of seven years of cuts, spending in 2018 is to be frozen, even though economic growth is projected to stand at 2.7 per cent.

If implemented, these plans would lead to the end of public services as we know them. By 2018 spending on services would be almost one-fifth lower, even compared with today. And if the government continued to protect areas like the NHS, international development and schools, other departments would face cuts of around two-fifths. Many services will be spending less than half what they did ten years previously. The only option for limiting this damage would be more deep welfare cuts, and even the coalition has been struggling to find many of those, which don’t hurt pensioners.

The most wilfully counterproductive aspect of the Treasury plan is perhaps its proposal for public investment. Yesterday the OBR revised down its expectations for business investment as a driver of recovery, suggesting that public investment is needed more than ever. But for the two years after the election it is to be flat in real terms. This is a further decline, as a share of GDP, and a further restraint on growth.

None of this is inevitable or necessary. In October, the Fabian Society Commission on Future Spending Choices proposed another way. We argued for a significant boost to public investment and for overall spending to rise after 2015 by one per cent a year for two years. This would take spending as a share of national income to the pre-crash benchmark of around 41 per cent of GDP. After that, expenditure should return to trend and match annual rises in GDP.

The Fabians’ proposed spending path is totally compatible with sustainable public finances but diverges hugely with Osborne’s spending plans. By 2018 there would be almost £40bn more to spend, enough to turn Osborne’s huge cuts to public services into a freeze. There would still be tough spending decisions to make, but meltdown could be avoided.

This begs the question: how can any MP who values the public sector can remain silent? One suspects many Liberal Democrats simply don’t understand what the coalition’s post-2015 plans entail. It is not just Labour, but the Lib Dems too, who must define an alternative, so that the Tories do not set the terms of the fiscal debate as the general election draws near.

Osborne’s ideological cuts are but one route to sound public finances and many others are available. We do not need to deliberately 'overshoot' pre-crisis spending and permanently shrink the size of the state.