Even Thatcher didn’t cut public spending like this

David Cameron, talking about the Thatcher years earlier this week, remarked:

We never in the 1980s actually managed to cut public spending.

He’s right, of course. As this graph shows, public spending is one of the few things that can  seemingly defy gravity. It continued to rise under a Conservative government that was ideologically opposed to the public sector.

UK Public spending total

When the figures are adjusted for inflation there are some real-terms decreases, although these are only small percentages.

UK public spending real terms

According to the Institute of Fiscal Studies, the only significant real-terms cut in public spending in real terms was in 1988 -89, when it fell by nearly three percent, and that even this was due in part to a fall in unemployment and a reduction in social security claims.

Both Labour and the Conservatives have an interest in sustaining the myth of savage public spending cuts in the 1980s but, in truth, the cuts didn’t go very deep. The public sector didn’t get the increases it wanted and, in the odd year, it had to make do with increases below the rate of inflation. Over the long-term, though, public spending continued to grow.

At no point, even during the 1980s, was the public sector told that it was going to get less money next year. In fact, during the careers of all those currently of working age in the UK, there have never been cuts to the total amount of money the government spends.

It’s become a bit of a cliché to say that we are in uncharted waters but the public spending cuts being drawn up by politicians and civil servants really are unprecedented. Even the government’s relatively modest 9.3% real-terms cut over four years means that public sector organisations will have their budgets significantly reduced year by year. Many public sector managers will simply have to manage with less cash.

This has never happened before. Few people can imagine what a Britain with falling public spending will look like because they have never had to experience it. All but the very oldest among us have grown up in a period where the state did more and more each year and our expectations rose accordingly.

At the moment the public discussion of spending cuts is still theoretical. As psychologists say, we are intellectualising the idea of spending cuts but we haven’t internalised it yet. Most people seem to agree that a large reduction in spending is needed. I’m not sure that people will react quite so stoically when the axe falls on specific services that they use. The Education Secretary’s suggestions for cutting £2 billion from the education budget were greeted with howls of rage earlier this week. Cuts are fine in the abstract but there is a lot less enthusiasm for the real thing.

There is a similar sense of unreality among many public sector managers. Cuts might be discussed in executive team meetings but that doesn’t stop people going away and submitting an increased headcount budget for next year. “Sure, there will have to be huge public spending cuts in the future but next year my department needs more staff.” Like the rest of us, public sector workers have no experience of spending cuts and, for many, the reality hasn’t sunk in.

Whether the spending cuts start in 2011 or 2012 they will come as a massive shock, and not just to those who work in the public sector. Most of us have only ever known an expanding state. We have no idea what a contracting state looks like and what its impact will be on our lives.

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16 Responses to Even Thatcher didn’t cut public spending like this

  1. That’s overall spending, which is very important in terms of tax burdens and fiscal stimulus and so on. But what about spending by various departments?

    For instance, did Thatcher increase defence spending while reducing spending on other areas? If so, then we have known the experience of the effects of reductions on services.

    Also, I thought Anatole Kaletsky made a reasonable point here:
    ‘According to the Institute for Fiscal Studies, the “eye-watering” squeeze needed to bring Britain’s public finances back into reasonable balance translates into a reduction of 8.6 per cent in departmental budgets spread over three years. If the directors of any private company sent their line managers an instruction to reduce costs by that amount over three years, with no loss of customer service or output, this would not be considered an insuperable challenge, still less a managerial nightmare.’

  2. Rick says:

    Yes, there may well have been reductions in individual departments but this implies reductions across the board or, if some are protected, massive reductions for others.

    Anatole Kaletsky’s comment is interesting. Private sector managers, in the more efficient organisations, are used to cutting costs year-on-year but public sector managers aren’t. Most have only ever experienced growth – the ‘good’ years are when budgets increase massively; the ‘bad’ years are when they don’t increase by very much. That’s why they instinctively ask for more staff even while they are talking about spending cuts.

  3. I suppose so. We won’t really know what happens until it’s happened.

    If you’re a pessimist, it could be that poor management will mean the cuts have a terrible effect on services.

    If you’re an optimist, there might be enough fat in the system that the cuts can be achieved relatively painlessly.

    I suppose I should pick one and loudly defend it with unwarranted confidence.

    • Jim says:

      I know exactly what will happen. Its exactly the same as what happens in local govt when costs have to be cut. The first things to go are the frontline service providers, the people actually doing stuff that the public see. Its easier to do this because it causes maximum pain, and public outcry, and makes the case for higher council taxes, and greater govt subsidies.

      If they were to cut the management flab, and non essential spending and pare down on purchasing costs etc, and treat the council taxpayer the way a business treats its paying customers, the public wouldn’t notice a thing, and might get the idea that govt depts could cut costs on a regular basis without harming services, and we can’t have that now can we?

  4. Pingback: Public Spending, the cold bath to come . . . part XXIX « Freethinking Economist

  5. Rick says:

    Theo – Loudly defending things with unwarranted confidence is one of the less appealing blogger habits. This is an ambiguous subject because no-one knows what is going to happen. It’s therefore fine to have vague and shifting opinions, in my view.

    I think there is a lot of fat in the public sector, especially in central government. My fear, based on experience, is that the managers in these organisations don’t have the skills to reduce these costs (if they did, they’d have done it by now) so they take the easy option and cut frontline services instead. For this reason I tend to favour your pessimistic option.

    Then again, it’s been a long week. Perhaps I’m just in a bad mood.

  6. ad says:

    The first graph would appear to be meaningless – why is it there?

    The second graph shows that total spending was flat throughout Mrs Thatchers time – even during the early 80’s recession, when the social security budget must have exploded. Some parts of the government must therefore have experienced cuts. We can certainly use the experience of those departments as a guide.

    • Rick says:

      It’s there to show that David Cameron’s assertion that the Tories didn’t actually cut public spending in the 1980s is, in a sense, true. In absolute terms, public spending has never been cut.

      You are right, the social security budget must have increased, so there will have been a squeeze on some departments but spending still went up in real terms for most years. Now we are talking about cuts in absolute terms, (Labour by a small fraction, the Tories probably by a lot more) when social security demands are going up and debt repayments are eating up our budget too.

      My point being that this time the cuts to individual departments will probably be even worse.

    • The Great Simpleton says:


      Anyone who was around in the 80’s and involved in any massive cuts will have been very junior and not involved in the management decision making process. If my memory of the time is anything to go by, their experience is likely to be one of bitterness and resentfulness making them hostile to any proposed cuts now.

  7. pablopatito says:

    Its all relative though, isn’t it? The graph shows that a savage cut of 10% would take us back to a public sector similar to the one we had in, say, 2003. I don’t remember things being that tough in 2003, really.

    Also, a lot of government spending in the last ten years has been in long-term investment. They’ve spent millions on rebuilding schools in my town. There is no need to continue this kind of investment in the short-term.

    But I do agree that unless you take our social security payments, the graph is a bit meaningless.

  8. Pingback: More on the Mansion Tax dust-up « Freethinking Economist

  9. ad says:

    I don’t remember things being that tough in 2003, really.

    Is the government prepared to make redundant the people is has hired since 2003, and cut the pay of those who have had rises since then? If not, what will it cut?

    OTOH, there will certainly not be cuts before the next election, and by that time unemployment, and therefore the social security budget, should have peaked.

    • Rick says:

      Ad – I don’t think there will be big cuts until 2011 at the earliest. The budgets will ahve been set by the time the Tories win which will allow them to talk tough without actually having to do anything. It takes at least a year to make civils servants redundanct anyway.

      That said, once they start sacking people I think a lot will go. And a pay freeze for the July 2010 pay round might be on the cards too.

  10. Gregor says:

    I read once that the state now spends four times as much in subsidising railways as it did on British Rail. Does anyone know if this is true?

  11. It would be good to also have a measure of public spending as a share of GDP. IIRC, it has reached nearly 50%, and is at ridiculous levels like 80% in certain regions like Northern Ireland.

  12. Ted Alleyne says:

    I actually work in public sector housing and I can assure you that (1) we did have cuts in real terms in the 1980’s (2) we have been expected to reduce administration costs year on year for at least the past five years (which you will note includes most if not all of the Brown government) .

    Regarding “fat”, the idea that there are thousands of people doing non-jobs is a bit of a myth. Sure you can cut staff who are not “front-line”, but those staff do in fact provide vital support – try running an organisation without an adequately staffed IT or HR department and you’ll soon notice the difference. “Fat” in middle management tends to be the difference between being able to provide an excellent service and just scraping by – for example you can only devote proper attention to difficult harassment cases if you have experienced staff available to put in the work. But government ministers are probably not too bothered with council tenants’ lives being made hell by anti-social neighbours, so quality of service there is expendable.

    Comparisons with the private sector are not particularly helpful – trying to get helpful service from a bank caller centre or budget airline is quite as frustrating as trying to get a service from a local authority in my experience. The main difference is probably that private sector firms have been able to squeeze wages over the past couple of decades, whereas the public sector hasn’t. But having a low-wage economy across the board isn’t going to benefit most people, just the rich. Which is kind of the point of the current exercise, I suppose.

    In the 1980’s the physical fabric of our housing stock deteriorated massively and Labour’s investment has just about got it back up to scratch. I guess we’ll now see it all start to collapse again.

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