The Maynard Doctrine: The shrinking of the state: permanent or transitory?

Amidst Brexit and the plethora of Government initiatives following May's  June General Election, there is ambiguity about whether (even if desired by voters) it is possible to roll back austerity and restore public services.

Is the smaller state desired by Cameron and Osborne and produced since 2010 here to stay?

Background
With un-evidenced ideological enthusiasm, in the 1980s Reagan and Thatcher de-regulated the structure of banks, hedge funds and other financial institutions. David Cameron when he became Leader of the Opposition pressed for further de-regulation, thankfully rejected by Blair.

In 2007-08, the house of cards collapsed and financiers scurried to government to bail out the bad debts they had created.

The then-Prime Minister, Gordon Brown and his Chancellor, Alastair Darling prevented a major financial crash and economic disaster with government loans and guarantees to bankers who created the crash.

For their prompt action, we should all be truly grateful. Sadly their reward was to be denigrated as the perpetrators of financial disaster, rather than saviours who mitigated it.

The poor handling of these facts then and now led to a Coalition Government in 2010 and a new, but just as un-evidenced religion of austerity. Rather than acknowledging how Thatcher's de-regulation had created the financial crash, CamBorne (Cameron and Chancellor George Osborne) asserted that it was a product of Labour profligacy having "maxed out the nation's credit card", which had to be 'cured' by large cuts in public expenditure.

The new CamBorne religion preached that the only way to achieve economic prosperity was a significant and sustained reduction in the size of the state. This belief has been perpetuated by the May government.

Is there a “magic money tree”?
In the language of the current Prime Minister, “there is no magic money tree” from which to fund public expenditure and ameliorate austerity. This assertion rests on economic ignorance perpetuated by the media and naïve politicians.

Since 2009, the government (via the independent (ahem) Bank of England) has maintained demand by buying bonds and providing large infusions of cash into the economy: the State has a magic money tree called quantitative easing.

Monetary policy has driven down interest rates and produced large volume of liquidity that is cash, held by banks.

Ample stocks of money and low interest rates have fuelled a consumer boom, creating high levels of employment, substantial increases in personal debt and modest levels of economic recovery from the crash.

Government could have printed money and given it to public sector organisations. This could have created an alternative economic recovery as these institutions hired staff and continued to offer many of them good wages for essential public services.

Government could also have used the near-zero interest rates to finance public investment. Public transport could have been revolutionised and the Welfare State rejuvenated by investment in schools, hospitals and social care facilities.

Instead, the Government chose the neglect of public services, and the electorate did not complain about the boom in consumer spending fuelled by increased banking liquidity.

Such public investment may have paid for itself, but was prohibited by the ideology of creating a smaller state through austerity.

The “success” of austerity
The pursuit of the small state has resulted in a dilapidated public sector. Savage budget cuts for Whitehall departments and local government has led to 'economies' reducing the quantity and quality of public services and the infrastructure which sustains them.

One of the primary instruments used to cut public expenditure has been pay policy. There are Review Bodies for groups such as teachers, doctors and dentists and the police. Their purpose is to set annual pay increases annual. These bodies take evidence from employees and their employers, the State. The latter has set pay increases at 1 per cent for many years.

The Review Bodies accept this as a maximum and, unsurprisingly, announce pay increases of 1 per cent. This is a nice game of charades swallowed by the media, which clearly makes the annual Pay Review “rounds” a farce, whilst diverting blame from government.

The success of these policies ensured not only that government could cut taxation, for instance Corporation Tax, Capital Gains Tax and Inheritance Tax, but it could also celebrate having a smaller state as a proportion of the national income.

The cost of this, in terms of reductions in public services, has been tolerated remarkably well by the public - who were told that these harsh policies were the unavoidable result of Labour government profligacy. This travesty of the truth has been meekly accepted by unthinking politicians, media and the public.

The policy of austerity has created major challenges for public services. For instance: as local government has been cut by thirty per cent, service provision has been reduced sharply. In social care, this has resulted in the quantity and quality of care for vulnerable elderly and children’s’ groups being reduced.

People with learning difficulties only get care if their situation is 'severe'. Vulnerable elderly citizens in need of institutional care find privately run homes whose finances are cut by local authorities exerting fee controls and rigorous quality regulation.

Unsurprisingly, care homes are being shut whilst government advocates quicker hospital discharge to prevent bed blocking.

Conservatives tend to argue that markets work. And so they do, as austerity ruptures the supply not just of care homes but also for public sector labour markets. The nonsense of Brexit, together with the ten per cent devaluation of the pound, curtal the supply of doctors, nurses, agricultural workers and others from entering and staying in the UK labour force.

The public sector pay cap, a truly socialist policy if ever there was one, together with policies such the removal of nurse bursaries, has disrupted the domestic supply of public sector labour.

Control labour prices and workers respond with the inevitable consequence of shortages of prison officers, doctors, social workers, nurses, police and teachers. Pay caps are a great success in curtailing expenditure and undermining public services.

What are the political alternatives?
The 2017 election manifestos from the Conservatives and Labour exhibited naivety and ignorance. They are nice examples of fiddling whilst Rome burns.

Conservatives offer more austerity with knobs on! They promised no increases in education spending and then reallocated their existing budget in an obscure manner on July 18th.

They promised a social care reform arrangement untouched by human thought which was abandoned within four days of the publication of their manifesto. In an attempt to reduce inter-generational inequity, winter fuel allowances were to be means-tested, but there was no attempt to mitigate the inequity of National Insurance exemption for the retired.

There were also blunders about free school lunches, with their being replaced with under-funded free school breakfasts.

The rest was vacuous waffle which ignored the problems of re-structuring the economy and increasing support for the public sector. This fine “dog’s breakfast” was suitably rewarded in the polls, and a hung parliament

The Labour manifesto promised Utopia. University tuition fees were to be abolished; a modest amount was to be invested in the welfare state, including the NHS and social care. Public investment in infrastructure was to be increased, and the pay cap on public sector pay was to be abolished.

The problem was Labour's traditional one: how was this new spending to be funded? Even with income tax increases targeted, rightly at the top 20% of earners and the reversal of cuts in capital gains taxation and corporation cuts, the costings are problematic.

Labour’s cost estimates produced a nice debate about realism and evidence. One issue was elasticities: i.e. if you raise income tax, will that lead the rich to increase pension contributions, reduce taxable income and cut tax revenue?

As the Conservatives have found with their pay cap, the use of price controls affects human behaviour; this would be so with the Labour taxation proposals. Their forecasts of tax revenue appeared very optimistic.

Another issue glossed over by Labour is prioritisation of often sensible policies. How much pay inflation can be allowed after the easing of the pay cap? Cutting student tuition fees implies a massive redistribution to often middle class to be students and would be extremely costly.

Should the NHS, social care and the schools take precedence over cutting university tuition fees? Perhaps increases in social security to take children out of poverty should take precedence over all these other issues? The “purchasing” of the student vote has clear opportunity costs, which the rest of society may not prioritise.

Then there is Brexit

A principle determinant of tax yield is the size of the economic cake: national income. The main determinant of expenditure on public services such as the NHS is overall income. When economies are stalled as in 2007-8 reflation is required either through tax cuts or monetary policy. At present, the economy is near full employment and policymakers are contemplating constraining monetary policy (the magic money tree) as inflation threatens.

Real incomes are still below 2007-8 as the economy staggers back to levels achieved a decade ago.

Ideology once again is likely to influence national income. This time by reducing living standards with a hard Brexit. Even a milder soft Brexit is likely to disrupt and retard national income over the next decade.

Hopefully the Brexit “suicide note” will not be signed and access to the single market with free movement of labour can be maintained. Such an outcome whilst welcome will only come with much debate and conflict. The forecast for the economy for the next 5-10 years is highly uncertain and very unlikely to afford high levels of increased public expenditure

Conclusions
The policy of austerity has led to radical reductions in the funding of the public sector and the withering of the State. Reversing this in current economic circumstances, in particular relatively static at best national income and constrained monetary policy, is unlikely

The ideologues appear to have triumphed in reducing the size of the state. Its significant reversal appears implausible.

Austerity will continue, and the poor and the disadvantaged will continue to be hurt. This is a triumph of ideology over the interests of the majority of the population.

This pessimistic outcome can only be mitigated by radical policies that will be the subject of my next Health Policy Insight.