Public spending can hold an economy back – by John Redwood MP

Warwick Lightfoot is publishing “Sorry we have no money: Britain’s economic problem” (Searching Finances 2010) to argue the case that any country which allows public spending to go above 35% of National Income will grow less quickly and will be less well off than one which keeps control of its public spending. His wish to see our current proportion of public spending much lower is shared by all three political parties, though none of them have yet been so bold as to propose his resting place of 35%.

He quotes sources to suggest that the increases in public spending under the last Labour government cut the UK growth rate by between 0.5% and 1% each year. He reminds us of the Bacon and Eltis thesis from the 1970s, which stated clearly than excessively high levels of public spending in relation to National Income can hold an economy back, damage its abiltiy to generate jobs and serve customers in the private sector, and undermines the tax base. It leads to the problem of “too few producers”. High levels of public spending imply high levels of taxation and borrowing, which is just deferred taxation. This in turn undermines competitiveness, persuades people to set up business elsewhere or puts them off setting up altogether, and makes it diffiicutllt for established companies to compete well.

Mr Lightfoot reminds his readers that public spending in the UK grew at an annual rate of 10.7% in cash terms between 1970 and 1996. In the lower inflation era that followed Labour pushed public spending up by 6.3% a year. The present government wishes to slow the pace to 2.1% a year growth in 2009-15. During this long period public spending as a percentage of National Income has fluctuated as widely as 36% and 50%. The highest percentages have been reached during downturns. The best growth rates have often been achieved with the lower proportions of public spending.

The book reminds us that past recoveries have taken place against a background of cutting back on the size and cost of the public sector. The private sector has in the past more than made up the running when this is occurring. In the 1980s the large privatisation programme trimmed total public spending, allowing debt repayment to occur. It also shifted substantial activity from the less productive public sector to a more efficient private sector.

In the last decade the large increases in public spending have been accompanied by declines in productivity. This has increased the drag on UK output and incomes from the surge in public sector employment. Mr Lightfoot thinks economies can become worryingly inflexible and unable to generate jobs and prosperity if public spending rises too high. He fears we have reached that point in some of the UK regions.

This is an interesting and timely book. No elected politician will nail his colours to the mast of public spending at 35% of National Income (as it almost reached in the early Labour years) for fear of Labour playing their usual trick of spelling out lurid cuts to get there. All main party politicians are signed up to Mr Lightfoot’s direction of travel, so they should look at his book to understand a little more why it might be good idea to cut the proportion of public spending in National Income. It is, of course, best done by growing the economy rather than by big cuts – exactly the course this government wishes to see, given its plans to carry on increasing cash public spending.

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