Austerity or profligacy in government finances?

IMG_0197 Chris and Kari

Both these words need to be used in the aggregate. It is not profligate if the government spends more money in one area of the economy and less in another area, and in the same way it is not austere if government cuts expenditure in one area of the economy and raises it in another area. When the government over-spends its budget it can be described as profligate and when it under-spends it can be described as austere. When the government reduces its overspending it can be described as less profligate than the previous budget and so on.

So when this government makes cuts in one area and increases spending in another area it is not being austere. If at the end of my financial year I went home to my wife and said that our income for the year was £40,000 and I have spent £50,000 and run up a credit card debt of £10,000 she would suggest I get my finances in order next year and add that it may be helpful not to spend so much time drinking and gambling. I may reply that I have introduced an austerity budget next year and I will be cancelling the newspapers and saving us £500 so that my additional borrowing requirement next year will be reduced to £9,500. My wife will point out that this is not austerity as austerity means that next year`s expenditure should fall to, say, £38,000 and £2,000 can then be used to reduce my credit card debt to £8000 rather than increasing it to £19,500. I would then explain that sudden cuts of that size will damage employment in the local bars and betting shops and she will then walk away moaning something about Keynesian mumbo-jumbo.

Over the last decade the government has been more and less profligate in its spending with one yearly borrowing requirement being added to the previous year, sometimes a larger increase on the previous year and other times a smaller increase. Last year the aim was to reduce the size of a further increase, but the outcome was about the same increase as the previous year, and even with this year`s promises of cuts it is still likely that profligacy will be little changed next year.

So it is time to face the truth and recognise that there is no austerity planned in the near future. The government may talk about cuts in some departments, but there will be off-setting increases in other areas as we are a long way away from the first step towards austerity which would be a balanced budget i.e. taxation equal to expenditure.

One of the reasons that government has found it so difficult to be austere is that it has ring-fenced education and health, which are probably the two biggest areas where savings could be found. Depending upon who I have been talking to I get the impression that expenditure in these areas could be cut anywhere between 20% and 50% and it would still be possible to have more doctors, dentists, nurses and teachers. This can be achieved by a 90% reduction in administration and bureaucracy and this can be achieved by removing the need to measure and manage the process of education and health and concentrate full attention on the outcome from our schools and hospitals. We now make the mistake of thinking that process is more important than outcome. It is almost certain that failing schools and hospital scandals have taken place despite the fact that the process has followed all the guidelines, and all the boxes have been ticked and rather than admit that the process has failed or was unnecessary we have tried to hide the failures. Time to target 5% -10% of the education and health budgets on administration and bureaucracy and 90% – 95% on caring for our minds and bodies.

All the percentages in the preceding paragraph are guesstimates designed to provoke discussion and true numbers need to be sought by persons more informed than I, but let us stop talking about austerity and see if we can deal with the main problem in government finance which is too much profligacy.

John Hearn 26/6/13

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