Spending-cut gloom at odds with 1990s evidence
Thursday, April 29, 2010 at 10:50AM
Simon Ward

Budget forecasts imply that public spending ("total managed expenditure") will fall from 48.1% of GDP in 2010-11 to 42.3% in 2014-15. The consensus view is that a cut-back on this scale will cripple economic growth and entail huge public-sector job cuts. Evidence from the 1990s suggests otherwise.

TME fell from 42.5% of GDP in 1994-95 to 37.2% in 1998-99 – a 5.3 percentage point reduction over four years versus the 5.8 pp cut envisaged by current plans. GDP growth averaged 3.3% per annum over 1995-99. This resilience, moreover, did not reflect offsetting monetary policy loosening – Bank rate was little changed between the start and end of the period.

Pessimists claim that public-sector jobs were slashed. They cite Labour Force Survey statistics showing that public-sector employment fell from a peak of 6.01 million in 1991 to a trough of 5.16 million in 1997, a reduction of 840,000. These numbers, however, are misleading because they fail to adjust for privatisations and outsourcing. An alternative measure unaffected by public-to-private-sector transfers is the Workforce jobs series covering public administration, education and health. This fell by only 130,000 – see first chart.

Rather than slashing jobs, the pay bill was contained by limiting wage rises. Public-sector earnings growth lagged inflation and was much lower than in the private sector – second chart.

Minimising the pain of fiscal adjustment requires policies to promote offsetting private-sector expansion. Rather than spending cut-backs, the key risks currently are tax rises that damage incentives to work and invest and excessive financial regulation that restricts credit supply needed for a sustained economic recovery.


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