Public Expenditure Growth Rates Forecast in the Budget Are Unrealistically Low, Claims Author of New Earthscan Book

19 May 2009 Earthscan

There is an important, yet neglected link between inflation patterns and controlling public expenditure, says Cambridge economist Jonathan Aldred, author of The Skeptical Economist. Personalized services such as those provided by the public sector are becoming significantly more expensive in relative terms, and therefore public expenditure as a % of GDP will inevitably grow, contributing to a national debt as high as 100% of GDP by 2015 and a 10% increase in taxes to compensate.

Price movements in different sectors of the economy are diverging rapidly, and for the past 12 years service sector inflation has exceeded manufacturing inflation. Consumer price index (CPI) inflation in services has averaged over 3.5% per annum, yet every year there has been deflation in manufacturing goods.

Although overall inflation is low or even negative, service inflation is still significant with education, housing and household services up 8.6% (CPI to March). This is because inflation is persistent for personalized, labour-intensive services - such as hair cuts and car repairs - as they don’t enjoy technological productivity gains, and therefore have little room to cut costs and prices. Such services are consumed domestically, so globalization imposes little downward price pressure, making them significantly more expensive in relative terms.

Public sector services such as education, health and social care are archetypal examples of labour-intensive personalized services and consume around a third of total public expenditure. As they become more costly in relative terms, public expenditure as a % of GDP will inevitably grow even without any expansion of these services to meet rising quality expectations.

These cost pressures have made public expenditure difficult to control, despite the cost-cutting measures imposed by successive governments. In the current climate the public expenditure forecasts in the Budget are unrealistically low, even if the UK escapes recession as quickly as the Treasury forecasts, and could contribute to a national debt as high as 100% of GDP by 2015, implying that the basic rate of tax will have to rise by around 10% to bring debt back under control (NIESR forecasts).

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