A UK austerity surprise

  • 23 July 2013
  • From the section Business
  • comments

What have been the big lessons of three years of "austerity"? Everyone will have their own view. But here's one that's surprised politicians on both sides of the debate: you can cut council budgets by a quarter, in real terms, and the majority of people won't really notice the difference.

I know readers will be jumping to correct me. In a recent poll by Ipsos Mori, 48% of people agreed with the statement that "budget cuts have gone too far and threaten social unrest."

But here's the funny thing; the same poll asked people whether they had personally noticed a change in the quality of their local services. 65% said they had not.

That fits with the anecdotal evidence I've been getting, travelling around the UK. Nearly every council leader I speak to - Labour or Conservative - says they're worried about future cuts, but they also say they've managed to protect the bulk of services so far.

The level of satisfaction with some councils is even going up: 74% of people now say they are satisfied with the services delivered by Hackney Council, for example. That compares with 23% in 2001 and 53% in 2006. (Thanks to Ben Page of Ipsos Mori for drawing my attention to these numbers.)

Graph showing % of Hackney residents satisfied with Hackney Council
74% of Hackney residents now say they are satisfied with the Council

That is quite impressive, when you consider that the average local council will have seen its budget cut by more than 25%, after inflation, by the end of next year. The number of people working in local government has also fallen dramatically, as I've discussed before.

Human nature

Why have these cuts caused so much less bother than many expected, when they were announced?

One answer - favoured by the right - would be that there was even more fat to cut in local government than people thought. Councils had too much money in the good years, and were spending it badly.

Another - which politicians on the left might go for - is that councils, and the government generally, have been good at concentrating cuts on a relatively small share of the population. On this view, the pain is there, it's just being not being felt by the people most likely to vote or write to their MPs.

Probably, it's a mixture of both. Poll after poll shows that one part of the population HAS very much noticed the effects of austerity: disabled people. Maybe George Osborne should not have been surprised by the reception he got at last year's Paralympics.

Likewise, many of the planned cuts to the welfare bill - like the benefit 'cap' for families- will be felt keenly by only a small number of households.

But, that's the welfare cuts. The fact that council leaders believe they have protected the front line so far suggests that there was also a lot of 'spare capacity" out there, ready to cut.

We know from experience that when money is flowing freely into a public service, civil servants tend to get less efficient at spending it. We then get more value for money out of them again, when budgets are cut. It's human nature.

You can't cut spending forever without hitting the quality of services, but after a period of rising spending, you can certainly have a period of getting the same for less. Indeed, the likes of Hackney actually seem to be delivering more.

For all the complaints, we may also be seeing this in the NHS. Calculating productivity in the public sector is notoriously dicey, but the latest data - see chart below - show productivity in the NHS grew more slowly than in the rest of the economy from 2001 onwards, when money was flowing in.

UK Labour Productivity for the healthcare sector and the economy as a whole
UK Labour Productivity for the healthcare sector and the economy as a whole (1995=100)

Since the financial crisis that pattern has gone into reverse, with productivity in the NHS outpacing the rest of the economy. (Though, health warning: the figures only go up to 2010, and we know productivity in the rest of the economy has been nothing to write home about.)

Austerity lessons

And the lesson of all this?

Mr Osborne's critics on the right would see a clear lesson: far from cutting government too much, he hasn't cut it nearly enough.

No doubt his Labour critics would see it differently: as a reflection, perhaps, of the way that even Labour councils have concentrated cuts on people who are less able to make a fuss.

But we economists might come away with a more positive thought: if there was this much hidden capacity lurking in local government - who knows, maybe we're seriously underestimating the rest of the economy's potential as well.