David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
For the past two and a half months, this website has been asking a question and providing contributors the opportunity to answer it. The question, of course, is how to reduce the demand for government. It is precisely the right question for ConservativeHome to ask.
Taxes are now at their highest since the 1940s and yet there is widespread dissatisfaction with the quality of public services. Borrowing is high; debt is now roughly the size of the economy for the first time since the early 1960s; and with interest rates having risen, debt interest payments are larger than our expenditure on education. The UK’s market credibility may have recovered somewhat since the chaos of the Truss administration, but we are still viewed sceptically and this, plus inflationary pressures, mean that there is no scope for a fiscal loosening.
There continue to be calls from some for tax cuts but the combination of our weak fiscal position and immense spending pressures mean that, whoever wins the next election, taxes will go up further. And that is before the really expensive demographic changes of an aging population begin to bite in the 2030s. Anyone who has read the OBR’s recent Fiscal Risks and Sustainability Report on the long term prospects of the public finances will be aware that we are in a very uncomfortable position.
This, I appreciate, is not a cheery note to begin a column but we should at least have an appreciation of the scale of the challenge. I would go further. Realistically, it will be quite the achievement to reduce the growth in demand for government, let alone reducing demand in total.
Either way, the issue is one which needs to be addressed. Over the course of the last few weeks we have seen a series of policy proposals focused on jobs, the family and schools. A frequently shared theme has been that we need to get ‘upstream’. In other words, we should get to the source of problems, deal with them there and reduce the subsequent downstream pressures which are currently addressed expensively by the State.
All very sensible. We should think about how we use the powers of the government – tax, spend and regulatory – to get upstream to reduce future demand.
It is not an approach that is supported only by Conservatives. Earlier this month, Tony Blair made a speech making exactly this point. He highlighted the dismal fiscal situation and described the current trajectory in the growth of the State as being unsustainable. He also highlighted that over the last 35 years, what we are spending on has been going in the wrong direction.
Blair drew a distinction between ‘productive spending’ which helps grows the economy or reduces future demand on public spending and ‘palliative spending’ which principally addresses a current problem. The trend is that palliative spending has grown compared to productive spending.
For example, Blair highlighted the fact that that disability benefit spending has increased more than day-to-day education spending. Social care spending increased more than transport investment. Pensions spending increased more than housing investment and the science and technology budget combined. Health spending doubled as a share of GDP and at £165 billion increased more than all the productive areas put together, but with only £6 billion on capital investment in health.
If we want to reduce the demand for future government spending, we need to prioritise current government spending on those areas that will help do so. In other words, increase the proportion of spending that can be genuinely described as investment.
Before setting out a proposal on how we might do that, it is worth taking a moment to understand why we are not already sufficiently focused on productive spending. The reason is very straightforward. All the political incentives encourage ministers to prioritise the immediate, day-to-day challenges, not areas of spending where the benefits will not be seen for years, sometimes decades. And long after the minister has moved on.
Resources, by definition, are limited. Priorities have to be determined and fiscal rules complied with (and, by the way, in my opinion, we do need fiscal rules) but when it comes to a choice between supporting current standards of living and maintaining current services versus improving future standards of living, improving future services and reducing future demand for services, the former usually wins out.
Some will blame the Treasury for this, unwilling to provide support for departmental proposals for ‘spend to save’ schemes. I have sat on both sides of the table in these discussions as both a spending and a Treasury minister and, while there is an element of truth to the criticism, not all the blame lies with the Treasury.
Departments very often come forward with business-as-usual plans and then have some additional nice-to-have proposals which they hope to get funded because they claim it will bring savings. On many occasions, the spend-to-save proposals lack much by way of robust analysis to support the case, the Treasury suspecting that we will get the spend but not the save. When the Treasury then says that a department can pursue the policy but will have to fund it by reprioritising out of existing resources, all enthusiasm within the spending department for the plan disappears.
At various times (but not at the moment), the Government’s fiscal rules have treated capital spending more favourably than current spending. There is certainly a case for that, but the distinction is a relatively crude one and does not really get to the heart of the issue. To take an example, spending on building a new prison constitutes capital investment, but resources put into rehabilitating offenders are generally treated as current spending. The latter, however, is much more likely to reduce the future demand for government action.
So how do we change the incentives on ministers and officials and ensure that any proposals are sufficiently robust? My proposal is to create a new independent institution, an Office for Spending Evaluation. Its role would be to publish a report on a department’s spending plans, categorising expenditure on the basis of how productive it is.
For example, spending could be allocated into five categories. Category One would be purely palliative, while Category Five would be very productive, on the grounds that there was a strong evidential case that it would benefit economic growth or reduce future demand for spending. The OSE might also revisit previous spending and evaluate how successful it was in meeting its objectives (although that might be a task best left to the National Audit Office).
Why would this help? The OSE would bring greater transparency and focus on how much the Government is focused on long- term benefits. When a department is looking to find savings, it will be all the more obvious if they are taking the easy route and cutting those areas where the benefit is not immediate. When increasing spending, it will also highlight which departments are thinking strategically about reducing demand.
Over time, this should help shift incentives to provide some political rewards for ministers trying to do the right thing – keeping tight control of palliative expenditure (winter fuel payments or the pension triple lock, for example), but with a willingness to invest in expenditure that will deliver genuine savings or encourage growth.
This will not solve all our problems, by any means, but a new institutional pressure towards spending more on the long term (and less on the short term), has an important contribution to make in reducing the demand for government.