Gordon Brown's Problem Is Socialism - WSJ

Gordon Brown's Problem Is Socialism - WSJ

Gordon Brown's Problem Is Socialism

By Warwick Lightfoot

Dec. 10, 2003 12:01 am ET

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Today Gordon Brown will deliver his Pre-Budget Report, which makes an economic forecast ahead of next spring's budget. The chancellor of the exchequer benefited from the fiscal legacy of his predecessors but to be fair he also made his own luck by making the Bank of England independent. He now faces a problem with public finances, however, and it is a problem of his own making, as well as one that goes to the heart of the new Labour project.

The political achievement of Mr. Brown and Prime Minister Tony Blair was to realize that the electorate would not vote for a return to tax and spend that risked provoking continuing financial crises. That is why in opposition Mr. Brown said that Labour would not be big spenders, but wise and prudent ones. There would be tough borrowing rules to control budget deficits strictly. This would enable Labour to get elected and to carry out its program. Some people on both the left and the right mistook this project as the pragmatic dumping of the social democratic agenda. It was no such thing; its purpose was to enable a Labour government to make practical progress with such an agenda.

New Labour's objective was to show that it was possible to increase spending and discreetly increase the tax burden, without raising the headline taxes that catch the eye, while managing a stable economy. And having done that the public would realize that there is nothing incompatible between the democratic socialist agenda and economic prosperity. Until about a year ago the strategy worked well. The tax burden rose, mainly on middle-income households, public spending rose sharply and taxes and benefits were redistributed to the bottom third of households by income. When people grumbled about the quality of public services ministers could say just wait and see how good things will get when the effects of the spending come through.

What came though was not increased public satisfaction arising from higher public spending, but increasing public irritation, and often bitter anger about they way they or their relatives were treated by the health service. It also became increasingly apparent that government targets and inspection regimes were aggravating the practical problems of managing public services rather than helping. Labour ministers showered local government and health services with a mass of initiatives and targets. These may or may not fit with local circumstances and create perverse incentives. New initiatives replicate existing programs and compete for the same limited pool of qualified staff driving up costs. The process illustrates the way that a centralized national bureaucracy can no more deliver effective public services than a command economy can deliver ordinary consumer goods.

Complaints from parents and patients and the gripes of teachers, nurses and doctors could be put down to "your unfortunate experience." But they were often powerful and compelling illustrations of a serious point.

The debate about the efficiency of the big increases in public spending and whether it would deliver the goods, however, has been taken a stage further by new work done by the Office of National Statistics. As part of the change over to the European System of Accounts, the statisticians tried to directly measure the output and the productivity of the public sector.

This work showed that big increases in public spending had not been matched by comparably large increases in the output of public services. An article in the July edition of Economic Trends by ONS statisticians suggests that the numbers imply that productivity in general government expenditure not only failed to be maintained or increase but it actually fell continuously from 1998 to 2001.

The problem of big increases in public spending without obvious statistical results in terms of improved output from public services has attracted the attention of City of London economists. David Smith chief economist at Williams de Broe calculates that between the second quarter of 1997 and the third quarter of 2003 total government expenditure and general government current expenditure has risen by 41% and 60% in cash terms, but volume output has only increased by 16%.

Measuring productivity in the public sector is never easy and the statisticians have to grapple with a number of technical problems such as identification issues. The U.K. Treasury is plainly uncomfortable with this work. And the ONS has announced that Sir Tony Atkinson, a distinguished academic economist who has devoted his career to studying inequality, will undertake a two year inquiry into it.

Yet, however much statistical refining may take place it will not alter the central problem that Mr. Brown has: public services cannot be transformed simply by throwing money at them. Tim Congdon and Stewart Robertson, economists at Lombard Street Research, have set the problem out clearly. There has been a public spending binge, which has been reflected an increase in public sector employment of 450,000 since 1998.

They point out that it has transformed the budget balance, from a large surplus of 4% of GDP in 2001-01, to a deficit that they project will be on the same scale in 2003-04. This return to government deficits is the result not of recession, but big government spending, when the economy is operating close to its trend rate of growth. It will not therefore be self-correcting. Something will have to give either spending or taxing. It is plain from polling and other research that the public are in no mood to pay higher taxes when they think the money is wasted.

Mr. Brown's stewardship of the British public finances offers a warning to other OECD governments. Simply increasing government spending does not improve public services even when the sums involved are big. Without reform it aggravates costs and yields little. Conservative and Labour governments in the 1970s and 1990s learnt the same lesson. Nor does it help to bombard schools and hospitals with targets, initiatives and inspections. Command and control is not a neat way of breaking the circuit but a rout to making things worse.

Mr. Lightfoot is an economist and was special adviser to the chancellor of the exchequer, 1989-92.