Public spending - a looming trilemma?

Do we have to choose between social justice and universal public services? This was one of the issues raised at this morning's 2020 Public Services Trust seminar.

Paul Johnson from IFS opened the seminar by explained the full scale of the fiscal crisis. The top line is that from 2011 the public sector faces a decade of year-on-year substantial real terms cuts. It is inconceivable that cuts like this can be made without a concrete and visible impact on public services.

This prospect framed the response from Lord McNally, whose distinguished past includes his time as a senior advisor to James Callaghan between 1976 and 1979. While recognising the scale of the crisis, he warned against alarmism, citing three sets of decisions:

• Roy Jenkins’ fiscal tightening in 1970 which many believe lost Labour the election of the same year         

• Denis Healey's agreement to IMF demands for cuts in public spending (cuts which some economic historians now argue weren’t necessary). It was this that led to the winter of discontent, Labour’s defeat in 1979 and its subsequent decline into near political suicide 

• Margaret Thatcher’s economic and fiscal policies which – whatever their economic upside – led to huge social dislocation and the running down of public services.

The priority for McNally was the maintenance of social cohesion, even if this meant higher taxes and a large ongoing public deficit.

The economist and business woman Bridget Rosewell countered by, first, by questioning whether most public spending really did contribute to social cohesion and inclusion, and, second, highlighting the risk that a Government not seen by the markets to be facing up to its fiscal responsibilities would be unable to finance its debt.

The subsequent conversation reminded me of the concept of the trilemma: a situation in which policy makers may be able to achieve two out of three aims but not all three. A classic trilemma in pensions policy comprises: incentivising saving, targeting the poor and limiting expenditure. Recently, speaking to a centre right audience, Niall Ferguson suggested free marketers faced their own trilemma: free trade globalisation, social stability and a small state.

In the face of the structural public spending deficit do we face a new trilemma? This is between national economic viability, protecting the poor (those already being hardest hit by the downturn), and welfare state universalism. As an example of this kind of thinking, it is significant that Conservative MP David Davis yesterday advocated means testing child benefit as a way of saving a few billion.

If protecting the poor while safeguarding the economy means reassessing universalism  the implications are huge and very troubling to progressives.