Buried in the Budget

Economic news the Tories should be shouting about Allister Heath

One of the mysteries of modern politics is why the Tories always undersell their greatest achievements. There was some good news in Philip Hammond’s Budget, such as the abolition of stamp duty for first-time buyers on homes worth up to £300,000, and some bad news, including a bevy of tax rises.

But one key development went entirely unreported: the size of the state, when measured purely in terms of public expenditure as a share of GDP, is expected to fall over the next few years. While the reduction is relatively modest, it is nevertheless excellent news, and ought to be cause for celebration, not embarrassment.

The Tories ought to be drawing on the macroeconomic research that explains how economic growth does better when Government spending – especially non-investment spending – is lower than when it is higher. It ought to have been cited repeatedly in the Budget, in the same way that the document alluded to research showing a connection between larger cities and increased productivity.

The figures make for fascinating reading. First, nothing has changed over the past year: on one definition of austerity – cuts to spending as a share of GDP – almost nothing has happened. The state didn’t materially shrink. Total managed expenditures, the official measure of total public spending, was at a hefty 39pc of GDP in the 2016-17 fiscal year, and this is expected to slip by a trivial 0.1 point to 38.9pc of GDP this year. So much for the sweeping cuts of the Left’s imagination: for all intents and purposes, it has been going up (almost) as quickly as nominal GDP.

If the forecasts are right, however, Hammond will then begin to shrink the state. Spending will drop to 38.5pc of GDP in 2018-19 and then fall a little every year until it reaches 37.7pc of GDP by 2022-23, when the forecasts end. Pie in the sky? Perhaps – but at least that’s the plan. The other interesting element here is the proposed composition of public spending over the next few years.

There are three kinds of expenditure: current spending – on wages, rent, medicines, that sort of thing; net investment – on buildings, roads, software and the like; and depreciation. The first and third kinds of spending don’t boost the long-term performance of the economy; the second can when the projects selected are sensible and yield greater benefits than costs.

Public sector net investment will remain at 2pc of GDP this year, before falling to just 1.8pc in 2018-19, a development which would appear to go against the Government’s claims that it is investing to boost the economy’s performance (especially given that depreciation, at 2pc, will be larger). But after that net investment it will increase to 2.3pc-2.4pc between 2021-23. This means that current spending will fall much more as a share of the economy than the top-line statistic would indicate: down from 35pc last year to 33.5pc in 2022-23.

Some forms of Government “investment” are akin to the most wasteful of current expenditure; building HS2, for example, will use far more resources than it will ever create. It is a disastrous waste of taxpayers’ hard-earned cash. Many roads, on the other hand, deliver large benefits in terms of increased mobility at a relatively low cost. Crossrail will make sense, but other projects won’t. On average, however, public sector net investment is better for the economy than current spending.

In the aftermath of the crisis, the Treasury used all available evidence to build its case for “austerity”. So why not now? Why not boast of the good news, from a free-market perspective, rather than simply allow it to remain buried in the Budget? Why not explain how the Government is continuing to cut public spending as share of GDP, moving us a little closer to the Swiss or Australian model, and why this will in time begin to help rebuild our productivity growth?

The problem is that the Tories don’t believe passionately in a smaller state any more: they are reducing the size of the state out of necessity, not because they think it will improve the economy. They see spending cuts as akin to tax hikes: a means by which the deficit can be reduced, an accounting exercise rather than a device to re-engineer society and shift the relationship between individuals and politicians. It is this tragic lack of principles that will prove to be the Tories’ undoing.