Bill Jamieson: Harsh lessons from the past on public spending cuts

Published on Monday 8 June 2009 21:43

FEW dare hazard a guess at how the current political drama will play out.

But the underlying reality remains. At the weekend, finance secretary John Swinney warned Scotland faced the "most significant spending cuts in a generation". He has written to the Chancellor to ask that he reconsiders plans to reduce spending, both next year and in the longer term.

Dream on. That looks most unlikely without even sharper rises in tax than the ones already planned or an even higher borrowing pile, risking a slump in sterling and the gilt-edged market. So, what might lie in store?

Previous attempts to brake or reverse the growth in public spending have been painful, but necessary. A recent paper by the Economic & Social Research Council and the Institute for Fiscal Studies (IFS) reviews two historical cases – the "Geddes Axe" era of the 1920s, and the 1975-1985 period, which included the 1976 IMF loan and subsequent attempts to restrain public spending under both Labour and Conservative governments. Given that public borrowing as a share of GDP is now at a similar level to that at the height of the First World War, what happened?

In 1921, Lloyd George, faced with a huge rise in public spending, set up a committee under businessman Sir Eric Geddes to find cuts of 100 million – this on top of the 75m the Treasury had persuaded government departments to offer.

The committee proposed 87m of extra cuts. Central government current spending fell by about 25 per cent (roughly 100 billion in today's terms) between 1920 and 1925, and did not rise substantially again until 1931. While spending on health was protected, there were heavy cuts in defence as well as in some of the social, welfare and pension provision introduced over the previous decade. Over a decade, the civil service headcount was cut by 35 per cent.

In the 1970s, public spending as a proportion of GDP had reached levels not seen since the end of the Second World War. In 1976, a run on sterling led to an emergency loan from the IMF. The terms involved immediate spending cuts and tax rises.

Public spending proved difficult both for Labour and the Conservatives to reduce. Though it fell in real terms between 1976 and 1977, it continued to rise (albeit at a slower rate), ending higher in 1985 than it had been a decade before.

In neither the 1920s nor the 1970s crises was health spending cut back. Checking or reversing this category of spending (currently 17 per cent of the total and rising by 5 per cent a year in real terms over the past decade) will be a major challenge.

Substantial job cuts were made in both periods, but the methods used would be hard to reproduce today.

The IFS argues the combination of pre-election fiscal stimulus and higher welfare payments has resulted in a permanent hit to the Exchequer of about 6.5 per cent of GDP, or 90bn a year. The Budget planned for this deficit to be cut over the eight years to 2017-18, starting after the 2010 general election, by tax rises (covering almost 20 per cent of the deficit), cuts in capital spending (about 30 per cent) and so far unspecified cuts in departmental spending, to amount to some 50 per cent.

Says the paper, "Even if that forecast proves any more robust than previous Treasury forecasts, and even if it proves politically durable, it means the equivalent of about half the spending cuts imposed by the Geddes axe 90 years ago, making real cuts in health, education and law and order spending inevitable."

So I do have some sympathy for Swinney's apprehension, particularly since real-terms public spending in Scotland has been belting ahead at an annual average rate of 6.25 per cent since 2000-01, and the 1.7 per cent decline forecast for 2010-11 will feel like a huge shock.

But public spending growth is critically dependent on economic growth to generate those extra tax revenues. And, judging by the zeal with which the SNP has scraped the public spending honeypot dry over the past two years, nothing has been held back to provide a cushion for the recession now upon us.

Parliaments both at Westminster and Holyrood now have to face up to their responsibilities in reducing the debt mountain, a direct result of the stinking thinking that government is only about ever more spending. Reality has dawned and now the politicians must face up to it.