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24 July 2000

An end to public squalor

William Keeganrejoices that, for all his strange pre-Keynesian noises, Brown has at last embraced hi

By William Keegan

One sometimes feels that new Labour and the modern British press thoroughly deserve each other. The Chancellor’s £40bn – no, sorry, £43bn – “spending spree” was hyped so much, so often, in so many newspapers and news bulletins that, when it was finally made official, there was a terrible sense of anti-climax. There was also a certain symmetry in the way that the disillusionment highlighted by Tony Blair’s political consultant, Philip Gould, in a leaked memo, coincided with the review’s publication. If anybody is associated with Labour’s ultra caution on “tax and spend” – and its decision not to increase direct tax rates – it is the king of the focus groups himself.

Labour’s tax pledges severely constrained the government on the public spending front. Elected to do something about the consequences of years of neglect of education, health, housing, pensions and transport, it spent the first two years of its life conducting, and even boasting about, a public spending freeze. Even where the ice cracked – in education and health, for example – we learnt that Whitehall departments were so infected by the freeze mentality that they were, in the Treasury jargon, “underspending”.

Since economic progress and government spending are essentially incremental, it is unfortunate, to say the least, that the public sector should have been allowed to get worse before it got better. It is the almost universal assumption that the next general election will be in May 2001. To which period do the much-hyped new government spending plans relate? Well, as a matter of fact, they relate to the period 2001-04. The 2001 financial year begins in April 2001. The current spending review in effect constitutes Labour’s manifesto for the next election. As Whitehall now searches the world for the doctors and teachers who are to fill the places made possible by the Chancellor’s extra funds, there is a growing consciousness that the opportunities for the entire first term have largely been squandered.

I see the phrase “private affluence and public squalor” creeping back into vogue. It was first popularised by the great J K Galbraith in the 1950s. It had some impact in alerting political parties on both sides of the Atlantic to the importance of good public sector services; and there was no doubt that the culture of Whitehall, under both Conservatives and Labour in the 1960s and early 1970s, was to give strong priority to the growth of public spending when drawing up the annual forecasts that preceded the Budget. The vogue for public spending got out of hand, and there was a natural reaction against it. Sir Edward Heath’s “mark one” government (roughly the first half of his 1970-74 period in office) tried to cut back on public spending; but when the 1972 recession brought unemployment to the previously unheard-of (postwar) level of one million, the brakes were taken off. The succeeding “mark one” Labour government (roughly the first two years of its 1974-79 period) continued the spending party, then had to retrench.

In 1980, the first spending white paper under Margaret Thatcher told us that public expenditure lay “at the heart” of Britain’s economic difficulty. The statement was criticised not only for being intellectually flabby, but also for being a gross “party political” intrusion into the pristine neutrality of government documents. Nowadays, almost all government publications read like party political handouts, and Spending Review 2000 is no exception. But at least we have a government that believes in the importance of the public sector, even if it has been punishingly cautious in getting round to the job.

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Yet all this boasting about repaying the national debt is reminiscent of interwar Labour governments whose economic policies one would rather forget. Luckily, we need not push the parallels too far, because Gordon Brown is most certainly a Chancellor who believes passionately in full employment and who, on the wider macro-economic front, has been rightly credited with considerable success.

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Nevertheless, what has come across is a kind of pre-Keynesian approach: borrowing is bad; first let us earn the money and then let us spend it – an interesting way of turning on its head the central driving force behind modern capitalism.

The Chancellor’s case from now on is a good one: a booming economy (outside a foreign trade sector beleaguered by the high pound) has combined with what the Tories call “the stealth taxes” to raise revenues, while the spending freeze (and that “underspending”) has kept outgoings well under control. The deficit has been transformed into a surplus, and spending on unemployment, social security and debt interest now absorb only 17 per cent of the government’s outgoings, as against 42 per cent a few years ago.

After a long period when public spending has been growing at below the underlying growth rate of the economy as a whole, even the Financial Times seems happy that, over the next few years, the arithmetic “adds up”. But it is going to take a long time for the “macro billions” to show up in the casualty departments, “sink schools” and railway trains.

Commentators point out that, even now, the Chancellor is only allowing public spending to return towards proportions of GDP recorded under those terrible Tories. Brown quite rightly makes much of the increases in capital spending he is sanctioning. About time. As Maurice Mullard, in his excellent book The Politics of Public Expenditure (Routledge, 1993), points out: “The record on capital expenditure points to the neglect of infrastructure expenditure by UK governments since the middle of the 1970s.”

Assuming (I don’t know whether Gould does) that new Labour will be given a second chance, ministers will have to face up to the tax problem in a few years’ time, when they have used up the leeway presently available from their previous prudence. The Conservatives sense an opportunity here. The government is quite wrong to say the Tories will “cut” public spending; their present stance is to reduce its rate of increase. When Brown offers tax cuts in his next Budget, it may be difficult for him to say there is something wrong with the Tories promising more tax cuts.

Still, the politics of left and right have returned from their strange deviation down that mysterious “Third Way”. As Nigel Lawson says in his memoirs: “There was one basic principle which guided my own efforts. Much writing on social choice and welfare economics implicitly assumes that all income belongs in the first instance to the state, and is then allocated by the state to individuals . . . The Tory belief should be the opposite one: that . . . a case has to be made for taxing it away.”

New Labour has finally recognised that public squalor makes the opposite case: for public spending. But at some stage, that case will require higher direct taxation.

The writer is economics editor of the Observer; his new book, 2066 and All That, is published by Iynx (£6.99)