Shrinking the state

What would it mean if George Osborne succeeds in cutting public spending to its lowest level since the 1930s?

The scale of the cuts for the rest of this decade implied by the deficit reduction targets in the Autumn Statement takes us into territory uncharted since the war. Many people believe Osborne has moved from the realms of the unlikely to the realms of fantasy and it’s not hard to see why. If the chancellor missed the deficit targets he set out in 2010 by a wide margin, why should we accept what he says in 2014? Especially when he says he can cut taxes at the same time.

Osborne must have hoped that all the headlines would be about stamp duty reform. Instead, news coverage has instead been dominated by the Office for Budget Responsibility’s projections of what further austerity would mean for the public sector. This graph on government consumption as a proportion of GDP sums it up:

That was the cue for pundits to dig out their old copies of The Road to Wigan Pier and for Osborne to accuse the BBC of ‘hyperbolic’ coverage in his grumpy appearance on the Today programme (ironically broadcast from one of the most iconic buildings of the 1930s).

This is only one way of measuring the public sector: on another, the OBR forecasts that public spending as a proportion of GDP will fall below the troughs of the late 1990s and 1950s to ‘what would probably be its lowest level for 80 years’. Note, however, that both projections are talking about  the lowest level since the 1930s – not the level of the 1930s.  Against that, though, the present-day system needs to cope with the higher costs of an ageing population.

Note too that the 1930s were a lot more complex than the popular image of mass unemployment and poverty implies. Wigan Pier, Love on the Dole or The Town That Was Murdered may reflect the experience in the industrial areas of Central Scotland, South Wales and the North of England but there was another 1930s too. This was also a decade of strong economic growth in the Midlands and South and a boom in housebuilding.

However, Osborne’s plans are still extraordinary in their scale even when you take all of this into account. Taking the Autumn Statement at face value, we are only 40 per cent into his programme of cuts. The OBR notes that: ‘The four successive year-on-year reductions in nominal government consumption during the next parliament – implied by the Government’s policy assumption for total spending beyond 2015-16 – would be the first since the Second World War.’ And the decision to ‘protect’ health, education and international development means that these cuts will fall disproportionately on other areas of spending.

With austerity already in place and savings from privatisation now limited, clearly this will not be achievable without a major reconfiguration of some services and the ending of others. Defenders of the coalition tend to argue either for ‘smarter’ spending or for the cost-cutting impacts of new technology. IT systems can certainly cut costs on administration. However, before we rush to close down prisons and sentence offenders to brain implants or deputise Judge Dredd, consider the fate of universal credit and its claimed benefits of ‘digital by default’.

Consider too the implementation of the cuts so far. You might think that there was some sort of plan for how ‘smart’ services would take the place of old-fashioned ones. Instead several recent reports from the National Audit Office have revealed government departments with little idea of the consequences and no plans in place to monitor them. To ministers like Eric Pickles and Chris Grayling, cutting spending seems almost to be an end in itself.

That got me thinking about whether there are lessons that Osborne could draw from the 1930s if we joined him in a Fantastic Voyage-style shrunken capsule on a journey back through time. Here are some thoughts:

Public sector salaries: Osborne could stop pussyfooting about with public sector pay freezes and take a leaf out of the book of Philip Snowden of the National Government in his September 1931 Budget. Ministers, judges, MPs, police and the armed services had their salaries cut by 10 per cent. Teachers’ pay was cut by 15 per cent. However, these cuts were fully reversed by 1935 whereas Osborne’s freeze seems never-ending.

Welfare: The same 1931 Budget saw a 10 per cent cut in unemployment benefit, an increase in insurance contributions and the introduction of a means test for transitional payments (benefits covering period after insurance has run out). The 1932 Budget saw more cuts in health benefits for the unemployed and sickness and disability benefits for married women. However, these cuts in welfare (and in wages) were cushioned by falling food prices in the 1930s, in contrast to the rise of food banks now.

So what could Osborne learn from the 1930s? He could replace conditionality and sanctions with the ‘genuinely seeking work’ test that applied from the 1920s but which became a subjective character test used to weed out ‘malingerers’. Women who refused employment in domestic service were often denied benefits.

He could look to the notorious Household Means Test, under which your benefits were cut if another member of your family was working. The impact was not just on people’s finances but on their dignity: some families were forced to tell their children to leave home; neighbours informed on each other; and officials inquired into every aspect of people’s lives. Some public assistance committees even interpreted the rules so strictly that mothers who said they were breastfeeding their baby had their benefits cut.

The benefits system is very different now, not least in the number of disabled people it supports to lead independent lives rather than confine in institutions. However, it’s not hard to see echoes of the 1930s in policies such as conditionality, the bedroom tax and the overall benefit cap, especially if Osborne succeeds in cutting it to £23,000 or even lower. It’s a sobering thought though that most of the cuts in benefits in the 1930s happened between 1931 and 1935. Osborne is planning not four but ten years of cuts.

Housing: Despite the cuts in public spending, the 1930s still saw the construction of 600,000 council houses and 2.5 million homes overall. Many of the factors that explain this (falling food prices meant falling land and house prices, labour costs fell, building societies were expanding, new methods made construction cheaper and planning constraints were largely absent) do not apply now. Few people would want to see a return to the ribbon development and jerry building that characterised the period but might building more houses just possibly be a way to tackle the deficit now?

Defence: It would be fair to say that Neville Chamberlain’s record on the budgets of the army, navy and air force did not work out too well for him in the 1930s. Osborne has already run into accusations of leaving Britain weak in the fact of a tyrannical enemy with what he’s done so far. However, the biggest programme of all, the £25 billion (or more) replacement for Trident, is apparently off the agenda.

Education: Reverting back to a 1930s-style system would be one way to save money. That 1931 Budget cut teachers’ salaries and central government grants. Where local authorities couldn’t make up the difference, class sizes soared to 40, 50 and even 60 pupils. Lessons for Osborne here might be to:

• Cut the school leaving age to 14. Cutting EMA is for wimps: in 1937 only 19 per cent of 14 to 17 year olds were in school.
• Reintroduce grammar schools (as many Conservative want) and allow them to charge fees. Then introduce modern and technical schools for the majority of children.
• Cut most university places. Even in 1938 there were only 50,000 university students, and our higher education rate of less than 2 per cent was the lowest in Europe.

If only Osborne hadn’t already transferred the costs of higher education to students. If only an educated workforce were not so vital to the future of the economy.

Health: The lesson from the 30s would be to replace the National Health Service with a combination of a bigger private sector, health insurance, local authority provision and charity. By 1938 20 million people were entitled to free treatment from a panel doctor and sickness benefit. However, that only meant insured employees and not millions of women and young children, the elderly and the self-employed and it did not cover things like dentistry and eyecare. See my blog about the birth of the NHS (and the welfare state) in 1948 for more about the system that existed before.

If only the successes of good healthcare did not mean that costs will continue to rise however we choose to pay for them. If only healthcare did not cost more as a proportion of GDP in countries without a national system that rely on private health insurance.

So what can we conclude from this journey back in time? First, the experiences of the 1930s and later of the war created the political conditions for the Beveridge report and the creation of the welfare state. Shrinking the state to its lowest level since the 1930s implies the reversal of all that – and maybe even more than that. Partly thanks to the welfare state, people live much longer and healthier and independent lives than would have been considered possible then. The costs to the state in terms of healthcare, social services and pensions are much higher too.

Second, the biggest scope for savings to shrink the state may lie in precisely the areas that Osborne has exempted so far. Arguments may continue about benefits for better-off pensioners but all politicians fear the political consequences. Significant cuts or the introduction of fees in education and health would be politically explosive.

However, at the same time, the true believers in a smaller state claim that the cuts so far have been achieved without the dire consequences predicted by critics. A return to the public spending of the 1930s may be a fantasy but that won’t stop them dreaming of reversing the post-war settlement that followed.