Doing something

In April 1935, with the staple industries stagnating and over two million people out of work, Harold Macmillan rose in the Commons to press for a radical policy of industrial reconstruction and public investment. What, he asked, were the arguments against public capital expenditure? ‘What is the case of the Treasury, the people who really govern England from the Box that is outside?’ His answer was that the Treasury was immobilised by fear of ‘artificial’ expansion, a consequent collapse and an increased burden of debt. As an answer it hardly did justice to the agile complexity of the Treasury’s slightly precarious commitment to economic and fiscal orthodoxy. But it adequately reflected what has since become the thinking man’s prejudice on the subject: that an increase in public expenditure (without a matching increase in taxes) could only have ameliorated Britain’s economic misery between the wars; and that the principal obstacles to a Keynesian (or Lloyd-Georgian or Mosleyite) recovery programme were the prejudice and ignorance of the Treasury knights, who, again in Macmillan’s words, ‘see the error which may be committed by doing something, and therefore...say “let us commit the crowning error of not doing anything at all.” ’

Of course, even in 1935 public expenditure was hardly a negligible element in the nation’s transactions. It accounted for some 25 percent of the national income. But ‘doing something’ was much more a characteristic of later years – of rearmament, war, peacetime military expenditure, burgeoning welfare and social programmes, and radical (or at least generous) industrial policies. By the time Macmillan had attained his political apotheosis, public expenditure was equivalent to about one-third of gross domestic product. On a fairly stringent definition of terms, it reached 40 per cent in the late 1960s and 45 per cent or more in the mid-1970s, receding and then rebounding after each spurt. As the brave new world of the 1980s unfolded, although the 1970s seemed to mark a break in the upward trend, the proportion almost touched 45 per cent again – now fuelled by the unemployment and social security benefits of a profoundly depressed economy. Once more the compassionate proponents of increased expenditure and new ‘industrial strategies’ cry ‘forward!’ Once more the defenders of financial rectitude and price stability cry ‘back!’ And once more the cry of the lame duck is heard in the land.

Yet, however much the intellectual arguments echo across the gulf of fifty years, the real world has changed too much to be subsumed in a banal comparison. For one thing, the mixed economy – Macmillan’s longed-for middle way – is now well-established: the starting-point and not the goal of economic and social policy. For another, a huge public expenditure, a substantial level of unemployment and a hefty rate of inflation all, perversely, co-exist. Admittedly, the commonly quoted figures exaggerate the state’s direct control over resources, since ‘only’ about 25 per cent of the national income is actually spent by government – the other 20 per cent consisting of transfer payments to recipients of benefits, subsidies and interest. Yet it also has to be remembered that these same figures do not include the expenditure of public corporations and nationalised industries. If they did – as they used to – the proportion of the national income involved would be getting on for two-thirds. Measured in terms of the proportion of the labour force employed by or dependent on public bodies, the flight from capitalism is hardly less headlong. If the Treasury is still guilty of adopting reactionary postures, it embodies that peculiar variety of reaction which accommodates itself to revolutions. In Getting and Spending, Sir Leo Pliatzky has a throw-away line to the effect that in the circumstances of 1979 ‘something around 40 per cent would have been about right as a ceiling on the proportion of GDP going to public expenditure’. And this from a former head of the public expenditure side of the Treasury! Rolling back the frontiers of the state to 40 per cent is hardly the stuff of which Bourbon policies are made.

How has all this come about? What are its implications? Above all, how does it relate to the arrival of those latecomers to the feast of affluence – inflation, unemployment and industrial stagnation? Ostensibly, these are among the topics considered in Getting and Spending, although in justice it has to be said that its substance is primarily devoted to the aggregate growth of that expenditure and to the fascinating recent history of attempts to plan and control it. But even if we make such allowances, the book provides only superficial answers to most of the really important questions. This is partly because Sir Leo is no doubt restrained by the discretion of a former civil servant: but it is also because he ‘explains’ the rise of public expenditure at much too high a level of generality, in terms of broad social aspirations and rather blandly specified political pressures. As a result, the constituent elements in that expenditure are rarely distinguished, and the ‘problem’ is seen as a single accounting, rather than a multiple institutional, one. In addition, he follows the official habit of viewing public expenditure primarily as a question of the control of commitments and projections, rather than as a vehicle for any probing of the fundamental causes of, or needs for, expansion.

In fact, public expenditure has tended to grow faster than national income in all Western industrial societies, and the conventional wisdom has attributed this to a straightforward set of causes: the experience of war, the commitment to full employment, and political pressure for augmented welfare services and benefits (about two-thirds of current expenditure is devoted to the social services). In Sir Leo Pliatzky’s rather unadventurous treatment of the subject, this ‘political dimension’ is, perhaps understandably, given much more weight than what he calls the ‘technocratic dimension’ (or ‘government by this little Whitehall community’). And he therefore makes a good deal of the rather disingenuous claim that ‘in our system of parliamentary democracy the pressures feed up one way or another until decisions to spend or not to spend are reached through the processes of collective Ministerial government’. But even at the most elementary level, one has only to ask whether the Treasury or the National Union of Mineworkers, the Chiefs of Staff or the National Union of Public Employees, are parts of the ‘pressures’ or the ‘processes’ in order to expose the limitations of such a view.

An alternative, but still essentially political explanation is that the growth of the public sector reflects the decay of the individualistic economy and the liberal society; that government intervention and some form of ‘corporatism’ are the responses of the state, business and unions to the crises of ‘late capitalism’. But the trouble with the metapolitical concept of corporatism, as with the idea of more ‘orthodox’ political reasons for state intervention, is that although they (and, indeed, many other possible models) are potentially plausible explanations of why there should be a lot more public expenditure now than in 1913, they shed too little light on the actual, rather messy dynamics of that growth. Of course, good old-fashioned politics have played their historical part, especially at moments of high drama – the creation of the modern welfare state, the vain pursuit of a non-inflationary boom in 1967-8, Edward Heath’s U-turns in the early 1970s, and Harold Wilson’s expensive dealings with Solomon Binding in 1974. Yet the unearthing of the thrust and pattern of the growth in expenditure, of the difficulty of stemming it for more than a year or two, and of the apparent impossibility of reversing it to any significant extent, demands sharper insights than a perception of the limitations of parliamentary government, and a more cynical grasp of interest groups and of how political animals respond to them.

It is in these respects that a book like Inside the Treasury scores. Throughout 1974-9 Mr Barnett was Chief Secretary to the Treasury: the Cabinet’s chief hatchet-man. And his book is naturally, and almost exclusively, concerned with the bruising attempts to restrain public expenditure from 1975, which educated the Labour Party at the cost of breaking it into two. As a post-Crossman diarist, and an honest man soured by office, Mr Barnett is able to let his hair down with abandoned indiscretion. No one responsible for spending other people’s money round the Cabinet table escapes his criticisms or his faint praise. Moreover, since his job entailed a constant round of ‘bilateral’ negotiations with individual ministers, it gave him an exasperated and painful insight, not merely into his colleagues’ frailties, but also into the chaotic, unprincipled, sentimental and self-interested forces which are the true inflators of public expenditure. Part of his excuse for dwelling with such apparent distaste on so many close colleagues (this one an abominable bully, that one an ingratiating but manic populist, another a commercial idiot, and a fourth apparently given to near-convulsions at the Cabinet in order to get his own way) is that he discovered how powerful is the role of personality in government decision-making. It has to be said that neither this proposition, nor the conclusion that politicians’ speeches seem to count for little in converting other politicians to their viewpoint, amount to a particularly startling political revelation. But both are related to an altogether more interesting observation, which alarmed and depressed him: namely, that policies and priorities not merely count for little – they hardly exist. Thus it was that he looked in vain for forethought or principle in the profligate outburst of expenditure in 1974 (which Sir Leo Pliatzky characterises as ‘collective madness’), in the retreat of 1975, and in the rout of the ‘dreadful year’ of cuts, 1976.

The realisation that public expenditure has rarely been informed by a guiding sense of priorities is one of the subsidiary themes of the collection of essays on Public Expenditure and Social Policy, assembled by Alan Walker. Its authors – practising or preaching social workers and administrators almost to a man – share the view that public expenditure policies are dominated by an economic and financial narrow-mindedness, and a bureaucratic crudeness which sees only monetary totals and ignores either priorities or the assessment of the effectiveness of expenditures. But at another level, there is little in Mr Barnett’s thesis for their comfort. For they assume that there is a fairly constant, and basically principled and ideological hostility to public expenditure – a presupposition which is given a significance which miraculously survives the evidence of long-run growth punctuated by uncontrolled explosions. Nor are their own individual, and otherwise well-documented, case-studies of particular areas of social expenditure very much influenced by the appeal for an examination of priorities, and, above all, of the effectiveness of outlay, which is made in the introductory chapters. Indeed, in spite of a rather schematic attempt to compare theories of expenditure growth (which sparingly juxtaposes ‘neo-Marxist’ models with those of the ‘radical right’), the book as a whole lacks the balance which might have justified its presentation under an ‘educational’ label. For it is very much a committed volume: compulsively concerned with what its authors take to be a permanent neglect of social expenditure; hardly touching on the means by which that expenditure is determined and allocated (not the least of its achievements is the complete neglect of any discussion of the role of public-sector unions); and too rarely transcending the simplistic identification of money spent on social-service intermediaries with the welfare of the putative beneficiaries.

The articulated system which embraces and sustains public expenditure is, in fact, both complex and multi-tiered. To take one example, while it is notorious that the Treasury is neither a passive nor an innocent participant in the political process, it is also a fact that the devices lovingly created by its members to restrain expenditure have often served to inflate it. Thus both Sir Leo Pliatzky and Mr Barnett describe the operations of PESC (the Public Expenditure Survey Committee) – designed in 1961 to control expenditure. And as they both show, PESC operated with a base-line of ‘volume’ planning, accepting forward commitments in ‘real’ terms, and on the extraordinary assumption that the British economy would grow at a moderately respectable rate. In the event, of course, the economy hardly grew, the figures were adjusted to the ‘relative price effect’ (a euphemism for the fact that the costs of the labour-intensive public services rise even faster than those of the private sector), and the proportionate significance of public expenditure therefore ballooned effortlessly as the servants of the sovereign state simply pencilled-in the inflated money values corresponding to their ‘plans’. A ratchet had been created and its creators found themselves turning its handle with helpless enthusiasm. Ultimately, of course, this pathologically symbiotic relationship between government spending and prices became a matter of deep anxiety, and Mr Barnett and others produced the idea of cash limits on expenditure. But by then (1976) the rate of inflation was so great that the application of cash limits encountered very threatening political and social constraints. They therefore became not so much a means of introducing order into the public sector as a covert form of incomes policy – partial, imperfect, inequitable – waiting to be breached by public-sector unions with muscle or by disbursing authorities with political resonance.

Yet even the sad and dramatic story of PESC is only a tiny instance of a general theme. It alerts us to the possibility that, within the context of political aspirations and bargaining, the really fertile sources of growth in public expenditure (and of inhibitions to any substantial reductions) may lie within the public sector rather than in the indeterminate relationships between the public sector and the diminishing rest of us. Treasury officials still have to deal with remorseless departmental pressure, mediated and impelled by other civil servants as well as by ministers and more expansive vested interests. Mr Barnett’s book shows only too well the degree of profligate irresponsibility involved in expansion and contraction alike. The very existence of a large public sector is a reason for its growth. It is the internal political economy, not the external politics, of public expenditure that needs the closest analysis. And the elements in that political economy are protean: optimistic guesses masquerading as planning; political manipulation from within; an undue and persistent influence on financial commitments by those who benefit from (even when they are not the objects of) the expenditure; unionisation which increases the costs of manning and defends the outcome as if it reflected the provision of actual value to ‘clients’; special pleading disguised as altruism; and the cynical diversion of economies to protect manning levels and politically sensitive commitments rather than the needy. Now and then reductions are possible, under the stress of imminent economic crisis, or when particular groups slip from public memory or lose political support, though even here the rarity or belatedness of the process means disproportionate distress for those involved. But on the whole the fact remains that, even in the last three years, the public sector as a whole has been relatively insulated from the harsh winds of reality as well as the market. And in this respect Mr Barnett has a sorry tale to tell of the lack of realism and reason at the very centre of the government of the late 1970s: of a neanderthal TUC receiving but never delivering the goods; of the workers’ co-operative lobby squandering resources and never keeping its promises; of the virtually criminal sloshing of industrial subsidies down the drain; of a silent conspiracy to ignore overmanning and inefficiency in the public sector. Obviously, none of this is to deny that much public expenditure is economically imperative, socially necessary and potentially efficient. But it would be puerile to suggest (which does not inhibit people from doing so) that because some spending is necessary all spending is desirable, and beyond reason to assume that where the aims are worthwhile the means are necessarily effective and sacrosanct.

But the drawback to the growth of public expenditure lies not merely in the inequity of some groups in society appropriating the use of other people’s resources by the manipulations of monopoly power. It lies also in the possible indirect economic consequences, in terms of prices, incomes and income distribution, and, above all, efficiency. Thus the missing link in Public Expenditure and Social Policy is precisely any sustained discussion of the long-run relationship between the rate of growth of the national income and the size, pattern and management of the public sector. On the contrary, the book opens with a resounding non-sequitur: that public expenditure in general and social spending in particular promote and support welfare and living standards. Whether or not this is the case depends on whether total welfare or income would have been greater or less if the public expenditure had been smaller or had been managed or spent in different ways. This critical question is not discussed at all seriously, even though on the face of it it seems unlikely that for the last thirty years the national income would have grown less fast, or exemplified more waste, if public expenditure had been allocated in conceivably different patterns or amounts.

In fact, for a generation or so after the war, the coincidence of growing public expenditure and an economy operating at levels of full employment inconceivable to anyone in the 1930s enormously reduced the room for manoeuvre. It also meant that the fear of inflation and the diversion of productive resources were shared, however feeble the outcome, by the heirs of both the pre-war Treasury and Keynes himself (it was, after all, in a mood of foreboding rather than in a spirit of complacency that Mr Macmillan told us that we had never had it so good). Yet incomes and welfare did rise, and inflation was fairly mild, at least by today’s standards. Admittedly, as Sir Leo Pliatzky points out, prices, money wages and unemployment all began to accelerate from the late 1960s. But the situation changed drastically only in the mid-1970s as inflation and unemployment took off. The crisis of the pound in 1976 was merely a proximate indication that the party had to stop – hence cash limits, cuts, and the attempt to curb the reckless extravagance of local authorities. Even so, as Mr Barnett scathingly demonstrates, the issue was fudged. (One of the more depressing chapters in his book is called ‘Fiddling the figures’, and describes the cynical manipulation of pseudo-cuts which did not affect real resources and which involved the ill-used ingenuity of Harold Lever to devise ‘ripping wheezes’ to put a good face on a bad job.) Yet by the end of the 1970s the pound was apparently, if only temporarily, secure as oil and high interest rates were poured on troubled waters. Now, however, slumpflation took over from stagflation. In 1979, the antipathy to rising prices led Mrs Thatcher to abandon the post-war consensus on full employment policy, and gave added impetus to a noisy assault on public expenditure. Yet depression and its associated ills crippled the Government’s attempts to control expenditure, plan borrowing or curb the money supply, while the political obstacles to effective reductions of expenditure have proved almost as daunting as ever.

Meanwhile, public expenditure is once again, as it was fifty years ago, advocated as a necessary cure for unemployment, even though few of its advocates care to deny the inflationary consequences which have so far prevented the Government’s L-turn from becoming a full-blown U-turn. For the same forces of institutional rigidity and sectional monopoly power which, since the 1940s, have helped expand public expenditure and depress productivity wait like furies in the wings to push up money incomes and prices as demand is restored. Towards the end of his book, Mr Barnett ruefully comments that ‘the real cause of our downfall was pay’. And this judgment can be extended from the squalid record of the Labour administration of 1974-9 to the postwar story of public expenditure, and perhaps even to the economic and social destiny of the country. The fact is that neither Mrs Thatcher’s original policies nor their wetter alternatives really address themselves to the underlying problems of the economy, to the institutions and attitudes which determine productivity and incomes no less than they shape public expenditure and social policies. And even supposing that present policies – perhaps even genuine economies in the public sector – succeed in producing price stability, and are followed by significant reductions in unemployment: what then? When demand begins to grow, what is to prevent a resurgence of nominal income growth, the exercise of bargaining power, another push on costs, irresistible upward pressure on public expenditure, prices and unemployment?

Exhausted and depressed after five years in office, Mr Barnett now believes that governments can do very little. But he also perceives that there is a lot to be done. With all the changes in economic and social structures since Mr Macmillan challenged the Treasury in 1935, too little has changed in the way of major policy prescriptions. Yet ignorant as we no doubt are, we can surely see two things clearly: on the one hand, that neither unemployment nor monetarism appears capable of permanently reforming the dangerous institutions; on the other, that economic and institutional problems cannot be solved by hurling money at vested interests. Indeed, like many of the policies now canvassed in the political arena, increased public expenditure is, in its present form, less a cure than part of the disease. Getting and spending may lay waste our powers, but it is as well to remember that the alternative pattern of behaviour was the result of being suckled in a creed outworn.