Responses to some critiques of the IoD-TPA report on cutting public spending

September 14, 2009 3:00 PM

By Corin Taylor, Mike Denham and Matthew Sinclair


We have had many positive responses to our report (PDF) on how to save £50 billion in spending, and the Chief Economist at the IPPR on the Today programme and Jackie Ashley in the Guardian today have both said that, while they disagree with parts of our report, they think that some of our recommendations should be adopted.


There are two particular negative responses we wanted to respond to, though.  First, Polly Toynbee has written an article for the Guardian making two key points:


Public vs. private sector pensions



"For example, Tory sabres rattle at public-sector pensions, but a TUC report based on Office for National Statistics figures shows that taxpayers contribute 10 times more in pension tax relief to the richest 1% of earners than the state pays to all retired public servants. If Labour made proper use of this killer fact, they would promise instead to abolish all higher-rate income tax pension subsidies, bringing in £6bn – far more than public pensions cost."


It is perplexing to see Polly Toynbee argue that pension tax relief for the richest 1 per cent is so high relative to the cost of public sector pensions.  She should realise that tax relief for high earners has been addressed in the Finance Act this year, with relief on contributions being restricted to 20% for this group from 2011.  High earners are also restricted in the amount of the pension fund they are allowed to build up, through the Lifetime Allowance of, currently £1.75 million. Introduced in 2006, this Allowance has seen many high earners restrict, or cease, pension contributions.  So she, and the TUC, are arguing about a “problem” that has already been “solved”.


The reality remains that private sector workers are having to save for their own retirement and, through taxation, pay for the unfunded pension promises that have been made on a DB basis to pubic sector workers. As longevity rises, this is a blank cheque – a cheque the private sector can no longer afford for its own workers in many cases. The unfunded liability in the public sector is over £1 trillion, and this is the real issue. 


Polly Toynbee argues that £6 billion a year is “far more than public pensions cost”.  Well, if you look at the Treasury’s own figures (Public Expenditure Statistical Analyses 2009, Table D1 - this covers all unfunded public sector pension schemes, so ignores the local government scheme, which, while funded, costs taxpayers £4.5 billion in employer contributions each year) you will see they tell a very different story.  In 2009-10, public sector pensions in payment total £24.15 billion.  This figure is made up of £20.03 billion of employer and employee contributions (of which around two thirds will be employer i.e. taxpayer) and £4.12 billion of extra funding from the Treasury (“Contribution to TME”).  So the “cost” to the taxpayer is almost certainly at least £15 billion a year.  And this ignores the extra liabilities that are being built up, which will have to be paid in future years.  Include these and the cost, the Treasury admits, rises to £40 billion (“Total departmental AME”).


The effect of spending cuts on the recovery



"Economists Anatole Kaletsky of the Times and Martin Wolf of the Financial Times, both conservatives, this week walloped the Tory fixation with rapid and savage paying down of debt. Mervyn King, no Labour friend, has been the great promoter of quantitative easing. Robert Chote of the IFS warns Britain may already be planning to withdraw fiscal stimulus too soon."


Anatole Kaletsky may have been burned, by his repeated insistence before the crisis that everything was fine, into advocating that aggresive stimulus measures continue, and other commentators might come to the same conclusions but the most recent and best informed studies suggest this isn't the case.  As David Smith, Economics Editor at the Sunday Times, says:



"Looking back on the recent past, the arithmetic tells us that even when public spending is rising strongly, it makes a modest contribution to growth. 2000 to 2008 was Gordon Brown's "splurge" period, when public spending grew roughly 4% annually in real terms, well above the economy's overall rate of about 2.5%.


Over that period, GDP rose £224 billion, just over 20%, in real terms. Government spending rose by just over £50 billion. It contributed only just over a fifth of growth even when ministers were spending fit to bust. This kind of static comparison, more-over, probably overstates the public contribution. Had spending not risen, and the taxes needed to pay for it, private-sector growth could have been stronger.


This is the way to look at it for the future. A paper by Goldman Sachs, called Fiscal Consolidation and the Exchange Rate, argues that in an open economy like Britain's, public-spending cuts affect the composition of economic growth but not its pace. This is because sterling is a safety valve.


A tightening of fiscal policy, accompanied by a weak currency, means that what you lose in government spending, you gain in exports. Sterling is well below fair value against the euro, so this effect is ready to roll as the global economy picks up.


Nor is this just theory. "It is worth looking at what happened to the economy the last time the UK tightened fiscal policy aggressively, during the mid-1990s," write Ben Broadbent and Adrian Paul of Goldman Sachs. "It performed well. Coming out of deep recession, and aided by a small acceleration in eurozone activity and a big decline in the currency, investment and exports bounced strongly. Aggregate demand grew by 3.5% a year."


This time it may be different, for other reasons. But we should not worry unduly that putting the brakes on public spending will kill recovery."


Will Straw's new "Left Foot Forward" blog has posted a number of criticisms.  We won't be able to cover all of them, but here are some key responses:


Public sector pay and competition with the private sector



"The Institute for Fiscal Studies record that, “Other things being equal, holding public sector pay below the levels available in the private sector is likely to lead to recruitment and retention difficulties and/or reductions in the quality of staff willing to work in the public sector.”


What this blog doesn't mention is that the IFS report was published back in January 2008, well before the crash and the sharp rise in unemployment. Since then, unemployment has increased by 800,000 and private sector pay increases have slumped (see here). In the current environment a public sector pay freeze would be most unlikely to cause recruitment and retention problems.


Job losses



"These figures fail to take into account any of the efficiency savings already announced by the Government. In the IoD/TPA report there is no mention of the Treasury’s Operational Efficiency Programme which has delivered more than £26.5 billion in savings, and plans to deliver a further £35 billion by achieving greater efficiency in a number of cross-cutting areas. As there is no mention of this it is unclear whether the IoD/TPA are proposing a further 10 per cent on top.


The report records that there are 70,880 non-frontline staff in schools, 313,853 non-frontline staff in the NHS, and 526,000 civil servants. This implies 91,000 job losses."


We don't attach much credibility to the dubious Gershon programme.  For reasons set out in our report.


The headcount reduction in the public sector implied by the policies described in our report is likely to be around 100,000.  Although it could be less if it was delivered through reduced hours.  Between March 2008 and March 2009, the most recent ONS data available, the private sector lost 683,000 jobs, while the public sector gained 285,000.  The public sector just hasn't faced up to the financial crisis it is facing and needs to take the kind of steps to cut costs that the private sector has.  In that light, cutting 100,000 public sector jobs is necessary.  There is no way of seriously addressing the crisis in the public finances without some jobs being lost.


Sure Start


Firstly, the data on SATS test scores that we cite is the most up to date available.  Hence our statement “two out of five of this year’s 11 year olds (a cohort who would have had at least some access to Sure Start schemes from age two) will go to secondary school this September without having reached a sufficient level of competency in all three core subjects” is not affected, neither is “Illiteracy and innumeracy remain a stubborn feature of Sure Start area primary schools (those with a high percentage of children on free school meals): in 2003 the percentage of pupils on free school meals achieving the expected Level 2 (or above) at Key Stage 1 was 69 per cent; in 2008, that figure had not changed, remaining at 69 per cent.”  So there is a genuine issue about whether the programme has improved the education of disadvantaged children; and it will be interesting to see whether the “fully functioning” sure start programmes will make any real difference to these numbers.  Based on existing evidence, it seems unlikely. 


Secondly, the later National Evaluation of Sure Start report does contain some qualifications, acknowledging that some of the difference between its conclusions and the first NESS may be down to methodological differences between the two reports.  It also says “Nevertheless, however consistent the benefits detected in the current phase of impact evaluation, they should not be exaggerated, as all positive effects of SSLPs detected were modest in magnitude [emphasis added].”  So the second NESS report acknowledges that the programme is not making a big difference.  The National Audit Office report of 2006 found that neither Councils nor the centres themselves were aware of what activities cost, and were therefore unable to use resources cost-effectively. 


Third, as we argue in the report, it would be better to free up schools to deliver what communities need, rather than impose at the local level a top-down programme from Whitehall.  There is no reason why good schools cannot also provide good early years education. 


Providing good education for disadvantaged children is important, but the evidence shows that Sure Start is not delivering.  We do not have the luxury to be able to afford to continue with a programme that at best has mixed results.


Cuts in Non-Ministerial Departments



"The Crown Prosecution Service and the Serious Fraud Office are both non-ministerial departments. This would, therefore, result in the largest ever cut backs for these departments and could mean 10 per cent fewer serious crimes ever coming to justice."


When the National Audit Office investigated the CPS (see here) it found huge inefficiency, with prosecutions routinely collapsing because CPS lawyers weren't properly prepared, had mislaid files, or couldn't produce the appropriate evidence.
 
Non-ministerial departments are riddled with waste and inefficiency. HMRC is one of the largest and is crucial to Britain's fiscal probity. Yet it is so inefficient its losses to fraud and error on the payment of tax credits have recently increased to around £1.75bn pa, and it has just had its accounts qualified by the Auditor General for the seventh straight year (see here and this blog).


There is no reason to think that the response to a 10% cut in the budgets of the NMDs would need to be a 10% cut in the service provided.


Educational Maintenance Allowances


The blog selectively quotes our report and is therefore misleading.  Our full quote reads:



“Chart 2.1 shows that while there has been an increase in the percentage of 16-18 year olds in education or training since the EMA was launched, from 75.7 per cent in 2004 to 79.7 per cent in 2008, this is negligible in the context of the historical trends.  Over the same period, there has also been a decrease in the proportion of 16-18 year olds in employment, from 14.7 per cent to 10.0 per cent.  This suggests that a number of teenagers who were previously in employment are now in education or training.  At the same time, the number of 16-18 year olds not in education, training or employment (NEETs) increased from 9.6 per cent to 10.3 per cent between 2004 and 2008.”


A programme that has effectively taken people from work into training but has failed to halt the rise of the 16-18 NEET population is not a programme that we can afford to continue.

By Corin Taylor, Mike Denham and Matthew Sinclair


We have had many positive responses to our report (PDF) on how to save £50 billion in spending, and the Chief Economist at the IPPR on the Today programme and Jackie Ashley in the Guardian today have both said that, while they disagree with parts of our report, they think that some of our recommendations should be adopted.


There are two particular negative responses we wanted to respond to, though.  First, Polly Toynbee has written an article for the Guardian making two key points:


Public vs. private sector pensions



"For example, Tory sabres rattle at public-sector pensions, but a TUC report based on Office for National Statistics figures shows that taxpayers contribute 10 times more in pension tax relief to the richest 1% of earners than the state pays to all retired public servants. If Labour made proper use of this killer fact, they would promise instead to abolish all higher-rate income tax pension subsidies, bringing in £6bn – far more than public pensions cost."


It is perplexing to see Polly Toynbee argue that pension tax relief for the richest 1 per cent is so high relative to the cost of public sector pensions.  She should realise that tax relief for high earners has been addressed in the Finance Act this year, with relief on contributions being restricted to 20% for this group from 2011.  High earners are also restricted in the amount of the pension fund they are allowed to build up, through the Lifetime Allowance of, currently £1.75 million. Introduced in 2006, this Allowance has seen many high earners restrict, or cease, pension contributions.  So she, and the TUC, are arguing about a “problem” that has already been “solved”.


The reality remains that private sector workers are having to save for their own retirement and, through taxation, pay for the unfunded pension promises that have been made on a DB basis to pubic sector workers. As longevity rises, this is a blank cheque – a cheque the private sector can no longer afford for its own workers in many cases. The unfunded liability in the public sector is over £1 trillion, and this is the real issue. 


Polly Toynbee argues that £6 billion a year is “far more than public pensions cost”.  Well, if you look at the Treasury’s own figures (Public Expenditure Statistical Analyses 2009, Table D1 - this covers all unfunded public sector pension schemes, so ignores the local government scheme, which, while funded, costs taxpayers £4.5 billion in employer contributions each year) you will see they tell a very different story.  In 2009-10, public sector pensions in payment total £24.15 billion.  This figure is made up of £20.03 billion of employer and employee contributions (of which around two thirds will be employer i.e. taxpayer) and £4.12 billion of extra funding from the Treasury (“Contribution to TME”).  So the “cost” to the taxpayer is almost certainly at least £15 billion a year.  And this ignores the extra liabilities that are being built up, which will have to be paid in future years.  Include these and the cost, the Treasury admits, rises to £40 billion (“Total departmental AME”).


The effect of spending cuts on the recovery



"Economists Anatole Kaletsky of the Times and Martin Wolf of the Financial Times, both conservatives, this week walloped the Tory fixation with rapid and savage paying down of debt. Mervyn King, no Labour friend, has been the great promoter of quantitative easing. Robert Chote of the IFS warns Britain may already be planning to withdraw fiscal stimulus too soon."


Anatole Kaletsky may have been burned, by his repeated insistence before the crisis that everything was fine, into advocating that aggresive stimulus measures continue, and other commentators might come to the same conclusions but the most recent and best informed studies suggest this isn't the case.  As David Smith, Economics Editor at the Sunday Times, says:



"Looking back on the recent past, the arithmetic tells us that even when public spending is rising strongly, it makes a modest contribution to growth. 2000 to 2008 was Gordon Brown's "splurge" period, when public spending grew roughly 4% annually in real terms, well above the economy's overall rate of about 2.5%.


Over that period, GDP rose £224 billion, just over 20%, in real terms. Government spending rose by just over £50 billion. It contributed only just over a fifth of growth even when ministers were spending fit to bust. This kind of static comparison, more-over, probably overstates the public contribution. Had spending not risen, and the taxes needed to pay for it, private-sector growth could have been stronger.


This is the way to look at it for the future. A paper by Goldman Sachs, called Fiscal Consolidation and the Exchange Rate, argues that in an open economy like Britain's, public-spending cuts affect the composition of economic growth but not its pace. This is because sterling is a safety valve.


A tightening of fiscal policy, accompanied by a weak currency, means that what you lose in government spending, you gain in exports. Sterling is well below fair value against the euro, so this effect is ready to roll as the global economy picks up.


Nor is this just theory. "It is worth looking at what happened to the economy the last time the UK tightened fiscal policy aggressively, during the mid-1990s," write Ben Broadbent and Adrian Paul of Goldman Sachs. "It performed well. Coming out of deep recession, and aided by a small acceleration in eurozone activity and a big decline in the currency, investment and exports bounced strongly. Aggregate demand grew by 3.5% a year."


This time it may be different, for other reasons. But we should not worry unduly that putting the brakes on public spending will kill recovery."


Will Straw's new "Left Foot Forward" blog has posted a number of criticisms.  We won't be able to cover all of them, but here are some key responses:


Public sector pay and competition with the private sector



"The Institute for Fiscal Studies record that, “Other things being equal, holding public sector pay below the levels available in the private sector is likely to lead to recruitment and retention difficulties and/or reductions in the quality of staff willing to work in the public sector.”


What this blog doesn't mention is that the IFS report was published back in January 2008, well before the crash and the sharp rise in unemployment. Since then, unemployment has increased by 800,000 and private sector pay increases have slumped (see here). In the current environment a public sector pay freeze would be most unlikely to cause recruitment and retention problems.


Job losses



"These figures fail to take into account any of the efficiency savings already announced by the Government. In the IoD/TPA report there is no mention of the Treasury’s Operational Efficiency Programme which has delivered more than £26.5 billion in savings, and plans to deliver a further £35 billion by achieving greater efficiency in a number of cross-cutting areas. As there is no mention of this it is unclear whether the IoD/TPA are proposing a further 10 per cent on top.


The report records that there are 70,880 non-frontline staff in schools, 313,853 non-frontline staff in the NHS, and 526,000 civil servants. This implies 91,000 job losses."


We don't attach much credibility to the dubious Gershon programme.  For reasons set out in our report.


The headcount reduction in the public sector implied by the policies described in our report is likely to be around 100,000.  Although it could be less if it was delivered through reduced hours.  Between March 2008 and March 2009, the most recent ONS data available, the private sector lost 683,000 jobs, while the public sector gained 285,000.  The public sector just hasn't faced up to the financial crisis it is facing and needs to take the kind of steps to cut costs that the private sector has.  In that light, cutting 100,000 public sector jobs is necessary.  There is no way of seriously addressing the crisis in the public finances without some jobs being lost.


Sure Start


Firstly, the data on SATS test scores that we cite is the most up to date available.  Hence our statement “two out of five of this year’s 11 year olds (a cohort who would have had at least some access to Sure Start schemes from age two) will go to secondary school this September without having reached a sufficient level of competency in all three core subjects” is not affected, neither is “Illiteracy and innumeracy remain a stubborn feature of Sure Start area primary schools (those with a high percentage of children on free school meals): in 2003 the percentage of pupils on free school meals achieving the expected Level 2 (or above) at Key Stage 1 was 69 per cent; in 2008, that figure had not changed, remaining at 69 per cent.”  So there is a genuine issue about whether the programme has improved the education of disadvantaged children; and it will be interesting to see whether the “fully functioning” sure start programmes will make any real difference to these numbers.  Based on existing evidence, it seems unlikely. 


Secondly, the later National Evaluation of Sure Start report does contain some qualifications, acknowledging that some of the difference between its conclusions and the first NESS may be down to methodological differences between the two reports.  It also says “Nevertheless, however consistent the benefits detected in the current phase of impact evaluation, they should not be exaggerated, as all positive effects of SSLPs detected were modest in magnitude [emphasis added].”  So the second NESS report acknowledges that the programme is not making a big difference.  The National Audit Office report of 2006 found that neither Councils nor the centres themselves were aware of what activities cost, and were therefore unable to use resources cost-effectively. 


Third, as we argue in the report, it would be better to free up schools to deliver what communities need, rather than impose at the local level a top-down programme from Whitehall.  There is no reason why good schools cannot also provide good early years education. 


Providing good education for disadvantaged children is important, but the evidence shows that Sure Start is not delivering.  We do not have the luxury to be able to afford to continue with a programme that at best has mixed results.


Cuts in Non-Ministerial Departments



"The Crown Prosecution Service and the Serious Fraud Office are both non-ministerial departments. This would, therefore, result in the largest ever cut backs for these departments and could mean 10 per cent fewer serious crimes ever coming to justice."


When the National Audit Office investigated the CPS (see here) it found huge inefficiency, with prosecutions routinely collapsing because CPS lawyers weren't properly prepared, had mislaid files, or couldn't produce the appropriate evidence.
 
Non-ministerial departments are riddled with waste and inefficiency. HMRC is one of the largest and is crucial to Britain's fiscal probity. Yet it is so inefficient its losses to fraud and error on the payment of tax credits have recently increased to around £1.75bn pa, and it has just had its accounts qualified by the Auditor General for the seventh straight year (see here and this blog).


There is no reason to think that the response to a 10% cut in the budgets of the NMDs would need to be a 10% cut in the service provided.


Educational Maintenance Allowances


The blog selectively quotes our report and is therefore misleading.  Our full quote reads:



“Chart 2.1 shows that while there has been an increase in the percentage of 16-18 year olds in education or training since the EMA was launched, from 75.7 per cent in 2004 to 79.7 per cent in 2008, this is negligible in the context of the historical trends.  Over the same period, there has also been a decrease in the proportion of 16-18 year olds in employment, from 14.7 per cent to 10.0 per cent.  This suggests that a number of teenagers who were previously in employment are now in education or training.  At the same time, the number of 16-18 year olds not in education, training or employment (NEETs) increased from 9.6 per cent to 10.3 per cent between 2004 and 2008.”


A programme that has effectively taken people from work into training but has failed to halt the rise of the 16-18 NEET population is not a programme that we can afford to continue.

Latest Blogs:

TaxPayers' Alliance Icon

The sugar tax and the public finances

6:00 AM 05, Dec 2016 Harry Fairhead

TaxPayers' Alliance Icon

Working for the taxman

6:00 AM 26, Nov 2016 Harry Fairhead

TaxPayers' Alliance Icon

Further thoughts on the Autumn Statement

4:56 PM 24, Nov 2016 James Price

TaxPayers' Alliance Icon

Have we had too much austerity?

10:57 AM 23, Nov 2016 Alex Wild