The Budget and Health Care

The reasons for substantially increasing current spending on the NHS and social care are obvious. Here is some data. The first is from the OECD on UK spending on health over a long period as a share of GDP (source).

This reveals an important truth which talk of ‘protecting the NHS’ is deliberately designed to ignore: health spending increases as a share of total GDP over time. The two noticeable points beyond that are the increase in spending under Labour, and the slight decrease in spending under the Coalition government.

One area of health spending that has been particularly hit in the recent past has been spending on social care by local authorities (source).

It is in areas like this that I get so frustrated with TV journalism. I have seen countless segments or interviews on what is causing the current crisis in the NHS and health care, but I do not remember ever seeing graphs like this. Is there an unwritten understanding in the TV networks that people cannot read graphs?

The outlook for the next five years for total health spending is further falls relative to total GDP (source).

The red bars are the projected growth in GDP, and the blue bars the projected growth in health spending. Unless something is done the current crisis in social care and the NHS will get worse and worse.

This increase in spending should be permanent and financed by a permanent increase in taxes. As such a specific tax funded increase in spending would be popular, it seems sensible to do it that way. Given the current crisis in the NHS, if this is not done in the budget we either have to downgrade our assessment of the morality of our current rulers still further, or assume they really do have an ulterior motive in running the NHS into the ground.

What would be the macroeconomic effect of such a policy change? You might expect a permanent tax financed increase in spending to have no effect. Taxes would rise by an equal amount to the extra government spending, and knowing this was permanent consumers would reduce their spending by the full amount of the tax cut. So private spending falls to offset additional public spending.

There are two reasons for thinking that would not be the full story. First, consumers initially appear not to fully adjust consumption to a tax change, even when that tax change is perceived as permanent. This is quite rational if they hold precautionary savings, and wish these savings to adjust to be a constant share of post-tax income. As a result there might be a short term boost to activity from a tax financed spending increase. This could be amplified, of course, if the tax increase was delayed for a year or two. As interest rates are still at their lower bound, such a boost to activity would be welcome.

Second, spending on health care is likely to be less import intensive than the private consumption spending it replaces. This would give a permanent boost to GDP and permanently reduce the current account deficit. Now both these effects might lead to an offsetting exchange rate appreciation, but the consequent reduction in inflation and boost to real incomes that this appreciation brings would not be unwelcome given the impact of Brexit.

Three final points that I hope are obvious. First these beneficial macro effects are incidental in the sense they are not required to justify the spending increase. The case for additional spending on health care financed by higher taxes is overwhelming on its own terms. Second, this is additional to the large increase in public investment, financed by borrowing, that should be underway right now. The changes in this direction in the Autumn Statement were an order of magnitude too small. Third, the second biggest threat to the NHS right now after lack of money are staff shortages. As an important source of staff is the EU, the government seems to be doing everything it can to make things more difficult.  

Brexit is another Iraq

In March 2003, 149 MPs voted against the Iraq war. They comprised the then much bigger Liberal Democrat party, the then much smaller SNP, 84 Labour MPs, Plaid and the SDLP, and the odd Conservative. Those voting against triggering Article 50 comprised the LibDems, the SNP, 47 Labour MPs, Plaid, the SDLP, one Green and a single Conservative. Is the similarity between these votes just a coincidence? I want to suggest not.

Let us begin by making an obvious point. You may think Iraq is different because so many lives were lost in the chaos after the war. But how many lives will be brought to a premature end because Brexit means we will have to live with an NHS in permanent crisis? Many people have not realised what a disaster Brexit could turn out to be. With a hard Brexit the CEP estimates an eventual cost of almost 10% of GDP each year. [1] That is huge: much bigger than the loss in real incomes already experienced as a result of the Brexit induced sterling depreciation. That alone could mean a 10% cut in money available for the NHS, if the share of NHS spending in GDP remained constant. But it is worse than that. If immigration falls, as the OBR expects it to, and because immigration improves the public finances, the cut in NHS spending could be a lot greater than 10%. Of course it may turn out to be not quite as bad as that, but we need to ask what exactly is the point of taking such a huge risk, just as people now ask what was the point of the Iraq war?

Iraq involved the US and the UK, whereas Brexit is just a UK affair. But think of the following mapping. The Neocons who pushed for the war are like the Brexiteers. May is George Bush, and Corbyn is Blair. Whereas Blair felt he had to go along with Bush, he also must have felt that getting rid of Saddam would be no bad thing. Whereas Corbyn and many MPs feel they have to follow the referendum result, Corbyn may also think that leaving the EU is no bad thing.

Does the referendum not make the two events distinct? The first point to make is that a clear majority of UK popular opinion (and US opinion) supported the war. Everyone of Murdoch’s papers around the world strongly supported it. However a minority of people were passionate in their desire for the war not to happen, with many taking part in the largest demonstration the UK had ever seen.

More importantly, the referendum was advisory, whatever politicians may have said. After an election the opposition does not feel obliged to start voting for all the government’s policies that they used to oppose? The idea that the Brexiteers, if they had narrowly lost, would have said ‘fair enough, we will keep quiet for 30 years’ is laughable. Most people voting Leave expect to be no worse off as a result, and would not have voted Leave if they thought otherwise. In these circumstances, the idea that the 52% majority will remain the ‘will of the people’ for very long is ridiculous.

The most important similarity between Iraq and Brexit is that both were huge decisions that were politically driven and which went against the available evidence. Hans Blix, who had been in Iraq looking for chemical weapons, thought it was a huge mistake. Chicot confirmed that the UK chose to invade Iraq “before peaceful options for disarmament” had been exhausted. Military action was “not a last resort”. The British knew that there were no serious plans for post-war reconstruction and reconciliation, but we joined Bush’s war nevertheless. It was not just a disaster, it was also a widely predicted disaster. Brexit is an almost universally predicted disaster among experts. For both Blair and Corbyn, their own misguided political views overrode expert opinion.

Just as Iraq destroyed Blair’s support among Labour party members, Brexit is likely to do the same to Corbyn. I expect the process will continue steadily over time, as bad Brexit news is greeted by Labour ministers not with a confident and resounding I told you so, but rather with feeble claims that May is enacting the wrong kind of Brexit. As the popular tide turns on Brexit, just as it did on Iraq (a majority of people now think they were always against the war), the opportunity Labour has missed by supporting Brexit will become clear. One difference is that Blair had enough popularity in the country to win a general election after Iraq, but the support of Labour Party members is pretty well all the political capital Corbyn has.

Thus the only interesting question is when Corbyn will go, and what the manner of his departure will be. I surprised a few people by saying in an earlier post that he needed to stay on for a while if we were to have any chance of stopping Brexit. My reasoning is as follows. The longer he stays, the greater will be the opportunity for the LibDems to achieve some eye catching victories like Richmond. (In the May council elections, for example.) Only then will it become clear to MPs from all parties that a Brexit backlash is the real threat, not UKIP winning in Labour heartlands. At present they and political commentators are in a Westminster bubble which is strongly influenced by the pro-Brexit press. That bubble needs to be pricked by events. If Labour switch leader and start opposing Brexit too soon, any Conservative losses could be put down to countless factors. It is vital that that a significant number of MPs begin to fear that a Brexit backlash will lose them their seat. Once (and if) that change in perception comes about, what happens next is anyone’s guess.

[1] This estimate is produced by a team led by one of our top applied economists, John Van Reenen, who has just moved to MIT.

2016 Autumn Statement

Got back from a trip to London to give my lecture (pics above: thanks to everyone at SPERI and New Statesman, plus Beth Rigby for chairing and everyone else for coming) looking forward to not thinking about economics for the rest of the day, only to find the Chancellor had given an Autumn Statement. Luckily the whole thing appears to be a damp squib compared to the expectations raised beforehand, so here are just a few points. On helping the so-called just about managing, see the ever excellent Ben Chu.

Public investment

Remember all the talk beforehand about substantial increases in public investment? What we got is increases of 0.3% or 0.4% of GDP in each of the financial years from 2017 to 2020. These increases give us figures that are slightly above the numbers we saw from the Labour government in the years immediately before the financial crisis. We should be spending much, much more when interest rates are so low.

Fiscal rules

There was also much speculation that we might return to more sensible fiscal rules, now that Osborne’s had been busted. Instead the new Charter for Budget Responsibility is honestly not worth the paper it is written on. We have a target for the total cyclically adjusted deficit (including investment) for a fixed year. Whatever the number involved, this makes two mistakes: having a fixed rather than rolling date, and by including public investment in that target. It is a recipe for panic cuts in public investment a year or two before the target date.

There is also a target of a falling debt to GDP ratio by the same date. I’m at a loss to understand why you need a target for this as well as a target for the deficit. The change in the debt to GDP ratio is after all just the change in debt (which is the deficit) and the change in GDP. So targeting the change in the debt to GDP ratio just adds to the deficit target some things that you cannot control: GDP growth and your position in the business cycle. I knew there would be no zero lower bound knock out, because that would be a clear admission that 2010 austerity was a mistake. But I did hope for something more intelligent than this.

I fear George Osborne has totally discredited the idea of a fiscal rule. Remember that Labour stuck to its fiscal rules for 10 years, before they inevitably fell victim to the largest recession since the 1930s. Yes there was fiddling at the margin, but the important point was that they did have a strong influence on what the Chancellor did. I now suspect that, by breaking a whole series of rules within a shorter period of years, whatever a Conservative Chancellor says has become pretty worthless.

The fuel duty fiddle

There is this great chart in the OBR’s autumn statement document.

It shows how Conservative Chancellors keep postponing rises in fuel duty. One obvious question is why. But the OBR is also concerned about whether this makes a mockery of its forecasts. Each year they are obliged by parliament to continue to assume that in all subsequent years the government will raise fuel duty after each ‘one-off’ cut. And almost each time the Chancellor announces a ‘give away’ for motorists: they will postpone any increase ‘just for this year’. You can see why they do it: it allows the papers to write favourable headlines. But if they really are going to go on doing this, it means that really their policy is to have no increases in fuel duty. Fiscal forecasts based on the assumption that they will increase fuel duty will be much too optimistic. The government is fooling parliament and the public, but the OBR cannot do anything about it because of the restrictive rules it is forced to operate under.

The cost of Brexit

The big news was of course the higher levels of borrowing. As this table shows, a significant part of that is due to the fiscal costs of Brexit.

Surprise surprise - there will actually be less money available for the NHS and other public services after leaving, rather than more. It is as if that red Leave bus just crashed and rolled over so it is now upside down. The two big factors are lower productivity growth and lower immigration. The OBR has, unsurprisingly, followed their own previous analysis (immigration) and the consensus economist view (productivity growth).

I can almost guarantee that the Sun and Mail will make no mention of this - or if they do it will only be to rubbish the OBR. So, following the theme of my lecture, I really hope that the broadcasters’ nightly news programmes pick this up. Channel 4 news did do so, but I didn’t watch the others (let me know in comments).

The NHS and squeezing the public sector

Not a penny more for an NHS in crisis. Make no mistake, as this blog has shown before, the current crisis in the NHS is simply because it has been starved of resources for the last six years. I really wish Labour (it has to be them, because they are the only party who the media will take any notice of) would run a campaign that busted the myth of a ‘protected’ NHS. But what Hammond’s refusal to do anything about this shows is that this government is continuing the squeeze of the public sector begun by the Coalition. Here is the relevant chart from the OBR. 

Is austerity to blame for Brexit?

Mark Blyth writes

“Strip away all the electoral politics at the moment in the U.S., the U.K., Italy, Spain and elsewhere, and that's the underlying political economy. It's a creditor/debtor stand-off where the creditors have the whip hand. And yet, the more they crack the whip, the more the backlash against austerity, in all its forms, gains strength.”

Or in other words, it is all about austerity. That is a big claim, particularly when applied to the current US elections, but I want to examine it in the specific case of the EU referendum. In short, did austerity cause Brexit? Given how opposition to austerity has been such an important part of this blog, in some ways it is an attractive line for me to take, but I do try and base what I say on evidence rather than on what is convenient.

In the past I’ve argued that there is a massive problem with this idea, and the related idea that Brexit was a more general protest vote against elites. The obvious time to protest against austerity was the 2015 General Election. Yet rather than protest against the party that introduced austerity and promised much more of it, the British people gave the Conservatives a surprise victory.

It is nevertheless possible to argue that austerity caused Brexit in more subtle ways. I’ve also argued in the past that some of the concern over immigration is actually the result over concern about reduced public services and low wages, and a belief that the issues are linked. To the extent that reduced access to public services and to some extent low wages is actually the result of austerity, and if much of the public believe that austerity is nevertheless necessary, then what should be a protest over austerity could get displaced as a protest about immigration.

If your response to this idea is to say that concern over immigration is also a result of racism and xenophobia, I would agree, but argue that this is beside the point. When talking about the Brexit vote, we should be concerned about what you might call the swing voters, a point that Chris Dillow also makes. Remember that a large number of those voting Leave would not have been prepared to pay anything to reduce immigration: they do not sound like voters whose overriding concern is to see less foreigners on their streets. It is the Brexit voters who thought Brexit would make them better off that we should be concerned about.

So there is a possible mechanism by which austerity could have caused Brexit. That mechanism is part of a more general phenomenon: when things get tough, people become much more receptive to potential unfairness. It is what helps drive a belief that welfare goes to scroungers, a belief that some Conservative ministers seem happy to encourage.

Is there any evidence to support the idea that the mechanism I’ve outlined was important? Here is polling on the EU referendum over a long time period (source).

If there is a general recession effect here (i.e. applying to every UK recession) it is masked by other factors. However after the global financial crisis and austerity we did see a big shift against the EU, although that could also be explained by the Eurozone crisis. The drop in support for leaving before the 2015 election seems to go against the austerity caused Brexit hypothesis, but that was also a time the government and much of the media was claiming that the UK economy was recovering strongly. The true state of the NHS only became apparent to most people after the election, when support for Leaving revived. So I do not think this historical evidence is conclusive either way.

There is some econometric evidence for a link between the extent of public service cutbacks and the proportion of people voting Leave (for a summary, see this VoxEU article). But as the article itself notes, the measure of austerity used could simply be acting as a proxy for more long term deprivation, which is a widely acknowledged influence on Brexit.

In my view more compelling evidence for an impact of austerity on the Leave vote comes from the little polling evidence we have on why people think high levels of EU immigration is a problem. Here is the result of a poll on this that I have reproduced before, which speaks for itself.

As I have argued here, the current squeeze on the NHS is unprecedented. The share of NHS spending in GDP has a natural tendency to rise over time, for reasons that are well understood. Yet not only did few in the media contest the ‘common sense’ idea that austerity was necessary, but also voters hear time and again that NHS spending is being protected. As they see services deteriorate, it is not surprising that they conclude that there is just too much demand. I doubt very much that it is coincidence that the Leave campaign’s bus had the £350 million a week going to the NHS.

So there is evidence that links austerity to the Brexit vote, particularly if we remember we are not talking about a core vote that would have voted Leave anyway (because of xenophobia, for example), but the swing voters who at other times and circumstances might have voted the other way. But what about arguments that the Leave vote reflected a reaction to deprivation caused by globalisation, or that it was the result of the malign influence of the tabloid press? (I’ve made both arguments in the past.)

There is some complementarity here. As I noted at the beginning, the media is important in transforming concern about austerity from the politicians that impose it into concern about immigration. More importantly, there is no need to find the cause of Brexit. It seems quite possible to believe that the vote would have gone the other way if we had not had austerity, or if we had a tabloid press that was not just a cheerleader for Leave and a broadcast media indifferent to expertise, or if the impact of globalisation had been offset in various ways. With the vote so close, it is legitimate to argue that all three on their own might have been responsible for Brexit, or equivalently that the Brexit result was a consequence of a perfect storm of bad policies and institutions.