Blog: Fixing the roof while the foundations are crumbling?

George Osborne has been pilloried for his single-minded pursuit of austerity. The notion that there should not have been a serious attempt to reduce the current deficit at least is a complacent and not altogether realistic one. The most damaging aspect of George Osborne’s approach is actually more profound than austerity per se. It is his over-arching strategy: welfare instead of investment, older citizens but not much for those of working age, and despite a rhetoric of acting in the nation’s long-term interest, a failure to do so.

Of course, the Chancellor would deny all this. He would say that returning state finances to overall surplus (if, indeed, that is achieved) is about long-term strategy. But that goal alone is not convincing. It matters how you restore public finances as much as whether you do.

The strategy pursued has been as much about reducing the size of the state as repairing public finances. Whilst the size of the state that Osborne hopes to achieve – 35 percent by 2020 – is not necessarily that unusual by recent historical standards, the context is. He has got there despite enormous growth in aggregate levels of health and pensions expenditure as a result of an ageing society and policy choices. Interest payments also take out a sizeable chunk of expenditure. And the consequences of this change are stark.

In 2008, benefits plus health expenditure comprised 55.3 percent of state expenditure. By 2020, these elements of expenditure will reach somewhere in the region of 63 percent. When added to increases in total interest payments, this shift has a very worrying impact. The state is becoming more welfare and less investment focused. In other words, this is anything but a long-term economic plan.

We are now under-investing in skills, infrastructure (all the increase announced today was pretty much accounted for by HS2), housing (notwithstanding today’s announcement), science (protected but we are still well behind), and research and development.

Even as state expenditure becomes distorted towards welfare, there are distortions within welfare itself. The state that has emerged is relentlessly intrusive. This is a corollary of the move to Universal Credit. Government has to cajole people into work, any work to reduce its expenditure on credit. The tax credit cuts may have been reversed today but the cuts will still be felt as increasing numbers move to Universal Credit over the next few years. The yo-yo between low paid work and a harsh welfare regime can be a desperate one. There is little to celebrate in today’s ‘u-turn’. It should more accurately be described as a stay of execution as the cuts will happen anyway (the cost of the ‘u-turn’ mysteriously declines from £3.4bn next year to £465m by 2020).

Bits of the state with a weak political voice have fared even worse. Those who work in FE can see the numbers dwindle and whole groups of society lose access to the skills that will improve their future productivity and enable more socially cohesive communities. Apprenticeships are great but so are traditional college vocational and basic skills courses (they are just not quite as great as Apprenticeships as Government research shows – just). Investment in hard infrastructure has taken a knock in this decade; investment in soft infrastructure even more so. Luckily, the Chancellor has accepted that the soft infrastructure necessary to reform the NHS and policing – as we advocated last month in the latter case – should be supported.  

In public services more widely, economic infrastructure, the science base, there is the same approach. Every long-term investment is heralded even when they mostly fall short. This is almost always driven by the Chancellor’s desire to secure (unnecessarily) an overall as opposed to current surplus and the desire to shrink the state. You don’t have to be a ‘deficit denier’ to see this approach as fundamentally flawed.

At the end of this decade, we will look back and reflect on what, despite trying circumstances, was an enormous missed opportunity. There will be a more brutal, coercive welfare state, enormous underinvestment in people’s skills, our science base, infrastructure, and housing. Any dispassionate assessment will see a huge opportunity cost. We will be leaner and meaner. We will have been fixing the roof while the foundations were crumbling.