Theresa May says she will “end austerity”: start with local government

PEF Council member John Weeks critically examines Theresa May’s recent promise to ‘end austerity’, and proposes that she start with restoring local government grants.

At the Conservative Party Conference the Prime Minister pledged to bring austerity to an end. I applaud that pledge and urge her to act on it. In light of Tory budget commitments through 2020, that pledge must beviewed with considerable scepticism.

If we take her at her word, what might delivering on her pledge involve?

To assess whether austerity ends, we need a generally accepted definition of austerity.  Spending cuts are not austerity itself, but rather the form it takes.  The driving ideological force of austerity policy is the goal of making public expenditure equal public revenue; to eliminate all public borrowing and thereby achieve the here-to-fore elusive target of “balancing the books”.  Austerity will end when the government treats the fiscal balance, surplus or deficit, as a policy instrument not as a problem.

Once we recognise that austerity is the policy to achieve zero public borrowing, the end of austerity is clearly revealed.  Ending austerity means restoring the expenditure sacrificed in the pursuit of zero borrowing.  A Financial Times article estimates a 14% fall in inflation-adjusted overall public expenditure since 2010.

The end of austerity does not require higher tax rates to prevent greater borrowing.  The assertion that restoring expenditure to its pre-austerity level requires more public revenue is no more than a restatement of the austerity ideology that budgets must balance, the “how to pay for it” cliché.

While many if not all public services have suffered from spending reductions since 1980, restoring local government funding would be the appropriate place to start, for at least three reasons.  First, of major spending categories, local government suffered the most severe cuts.  Second, the services delivered by local governments directly affect households – e.g. education, elderly care and supporting council house tenants.  And third, restoring this funding could be quickly done because salaries account for the overwhelming majority of local budgets.

Restoration of central government grants to local authorities would send a clear signal that the Prime Minister intends to end austerity.  How much expenditure would restoring grants to local government require?  Using the chart below, I start with the simplest calculation, returning grants to their annual level achieved in the first quarter of 2010, the last full quarter with a Labour government.  The quarterly numbers in the chart, all in current prices, are annual totals, each quarter’s grants plus the three previous quarters (“annualized”).  The numbers are not adjusted for inflation because neither the Office of National Statistics nor the Office of Budget Responsibility provides inflation indices at this level of detail.

Through the second quarter of this year Parliament local authorities received an annualized grant total of £112 billion, £15 billion less than for 2010Q1.  If inflation in cost of LG services followed the consumer price index, returning LG grants to where they were eight years ago would require an increase of £18 billion.

Returning to the funding level at the beginning of 2010 would be a very modest gesture.  In early 2010, LG grants represented 28% of other central government current expenditure, falling to 20% in mid-2018.  A serious move to end austerity in LG funding should bring spending back to its 28% share, requiring an increase (unadjusted for inflation) of £46 billion (blue line in chart).

Restoration of LG grants at 28% of other current expenditures does not account for spending losses due to the overall decline in current spending as a share of GDP due to austerity.  At the beginning of 2010 other current expenditures were 30% of GDP, falling to 27% in 2018Q2.  This decline in the share of national output going to public services constitutes the essence of the austerity ideology.  For Theresa May to deliver on “ending austerity”, a return to the early 2010 spending share is essential.  Doing so implies an increase by £60 billion.

Annualized Grants to Local government Compared to Last Quarter With a Labour Government, 2010Q1-2018Q2 (current prices)

Notes:

For each quarter expenditure is annualized, taking the sum of expenditure in that quarter and the previous three.

Actual compared to 2010Q1 – 2010Q1 value subtracted from each quarter.
Actual compared to 2010Q1 share of current spending – In 2010Q1 local government transfers were 28% of current spending. That percentage is applied to all subsequent quarters.
Actual compared to 2010Q1 share of current expenditure in GDP – Previous adjusted for fall in current spending as a share of GDP.
Adjusting for population growth – Previous adjusted for quarterly population growth at 0.2%.

Source: Office of National Statistics.

These calculations ignore an obvious change affecting the demand for LG services.  Our population is now 7% larger than it was in early 2010 (69.9 million compared to 62.5 in early 2010).  An end to austerity would return British residents to the level of local authority grants per person when austerity began.  This requires a pledge of at least £73 billion (“at least” because I have not adjusted for inflation).

“Where will the money come from”? It will come from growing taxation and a bit of borrowing.  A feasible and quite conservative programme to restore the irresponsible LG cuts might be to increase expenditure in each quarter until achieving the additional £73 billion at the end of the current Parliament, which implies an additional £8 billion each quarter.  If nominal GDP grows at the same rate as during 2016Q1-2018Q2 (0.9% per quarter) and public revenue remains at 35.8% of GDP (its average over the ten quarters), quarterly revenue increase would almost equal quarterly increases in LG grants.  Thus, annual public borrowing will be at almost the same in mid-2020 as now (23 billion compared to the present 21 billion).

These simple propositions – nominal growth continues at its present sluggish rate and the Prime Minister introduces no  tax cuts – allows for recovering of local government grants, with a fiscal outcome quite consistent with the dysfunctional obsession with reducing public borrowing.

Photo credit: Hazel Nickelson / Flickr

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