Planned future spending cuts return us to the Geddes Axe of the 1920s
Many commentators have not shied away from the severity of spending cuts to come. The Office for Budgetary Responsibility (OBR) and Institute for Fiscal Studies (IFS) both agree that cuts in the next parliament will outweigh those in the current parliament. The OBR have observed that the cuts will return spending to its lowest share of GDP since 1938. Robert Peston and Ed Miliband clashed before Christmas about how big a deal this is (discussed here). But we should be most concerned about the implication of cuts for the immediate macroeconomic outlook, and that means looking at the cuts in their own right, i.e. from the perspective of spending power in the economy. On the basis of the OBR projections for the scale and duration of future spending cuts, the only more severe consolidation in over a century was the Geddes Axe of 1921-23. That these disastrous policies are the nearest precedent for any prospective economic action beggars belief.
The chart below shows figures for annual growth in government spending in cash terms for the past 100 (ish) years, with projections to 1919. (The chart has been cut off at 50 per cent and -25 per cent for clarity; definitions and sources used are set out at the end of the post.) The orange shapes highlight episodes of cuts in cash spending lasting more than one year that were not associated with the two demobilisations from world wars.
Chart 1: Government spending, annual percentage growth
Any precedent goes back to the first half of the twentieth century. In terms of outturn, 2011 and 2013 were the only years when spending growth has been negative since 1947. Even the other years of the austerity of the current parliament have seen positive growth in cash spend, albeit greatly reduced from the norm. (Though 2014 is forecast at the highest growth for five years, which has shades of what used to be called the ‘political business cycle’.) But the OBR’s outlook for the next parliament is a different matter altogether: cuts are shown for four years in a row, in 2015, 2016, 2017 and 2018.
Actual cuts in cash spending were more commonplace over the first half of the twentieth century, but all came under exceptional conditions. The two most substantial periods of cuts came in demobilisations after huge spending increases through the two world wars. Outside these, there were two key episodes. The cuts in 1922 and 1923 known as the Geddes Axes, and the cuts in 1932 and 1933 that followed the Report of the May Committee.
The Geddes Axe cuts reflected the recommendations of the ‘Committee on National Expenditure’ chaired by Sir Eric Campbell Geddes (an industrialist who had been brought into the wartime coalition government as a civilian by Lloyd-George). Apparently the committee was set up in response to The 1st Viscount Rothermere’s (Daily Mail founder and prominent supporter of the appeasement of Nazi Germany) ‘anti-waste league’, a fascinating and chilling precedent to today’s Tea Party.
In 1931 the great depression was growing in intensity; in the UK major economic decline was exacerbated by the gold standard precluding any relaxation of monetary policy; repeated sterling crises led financiers to demand public spending cuts for exchange support. In February 1931 the Labour Chancellor Philip Snowden set up the ‘Economy Committee’ under Sir George May, the Secretary of the Prudential Assurance Company. Their report calling for cuts of £97 million in public expenditure was published on 31 July (equivalent to 2.4 per cent of GDP: £41 billion in 2013 money). The ‘most foolish document I ever had the misfortune to read’ (said Keynes) led to the implosion of the minority labour coalition government, and the instigation of the National Government (of the Tory Party, but initially under the defecting leader and chancellor from the Labour government). The National Government promptly took the UK off gold, and implemented the May proposals (though not in full).
Both of these episodes lasted only half as long as those scheduled by the OBR, but the scale of cuts over each was more severe; on the other hand – and critically – the resolution of each was very different as is obvious from subsequent spending outcomes on chart 1.
Chart 2 below compares the three episodes of spending cuts, with the full profile for spending across the next parliament against the comparable trajectories for the May committee cuts and the Geddes axe.
Chart 2: Episodes of cuts in government spending, indices
The severity of the Geddes Axe is shown in no uncertain terms, even after only two actual years of cuts, spending was still down 15 per cent after five years . But the May Committee cuts are a very different matter. While initially still very severe, the extent of increases after the cuts very quickly restored spending to well above the level when cuts began. With happy symmetry, spending was up by 15 per cent after five years rather than down.
This also refutes a common misperception about the government not spending in the 1930s. By 1934, under the National Government, expenditure was being expanded, with hefty increases of 10 per cent in 1935 and 13 per cent in 1936 coming ahead of spending for mobilization which began in 1937.
These increases in spending rather than the cuts that preceded them were the initiative that marked the decisive recovery from the great depression. They were implemented in spite of government debt at 183 per cent of GDP in 1933, which subsequently fell as low as 121 per cent in 1940. In contrast, the cuts of the Geddes Axe marked the beginning of the decade of deflation that preceded that depression; government debt moved in completely the opposite direction: from 150 per cent of GDP in 1921 to 180 per cent of GDP in 1923.
Plainly, as chart 2 makes obvious, Obsborne’s legacy owes more to Geddes than May.
This state of affairs indicates a profound reversal of the economic lessons of the past century. To say these lessons were hard fought is the greatest understatement. But they were lessons that were learned:
Worst of all has been the orthodox theory that bad trade calls for economy – economy in all new development, both public and private, economy in bankers’ loans, economy in wages, economy in social services, economy in employment, economy in enterprise, “freedom from thought.” This disastrous doctrine dominated British policy between the wars. The Geddes Report, the May Report, the Snowden folly in 1931, all illustrate it. … The Labour Party was right when it declared that all this was the exact reverse of the truth, and that the supposed cure only made the disease worse. The best cure for bad trade is to increase purchasing power and speed up development. The best preventative of bad trade is to maintain purchasing power and likewise to maintain a steady and well balanced programme of development. (National Executive Committee of the Labour Party, 1944, ‘Full employment and financial policy’)
While the OBR and others focus on the implications for the level of public spending there has been less discussion of any precedent to the coming cuts and the likely macroeconomic impact. To the extent that the past is any guide to the future the omens are grim indeed. We are fully and blindly engaged in repeating the mistakes of history. For whatever reason, most minds still remain closed to the lessons of the 1920s and 30s. Challenge to the ‘disastrous doctrine’ must come; we can only hope it does so quicker than it did then.
The government spending figures are based on the cash sum of government consumption and government investment expenditures. The measure derives from national accounts definitions and is based on GDP expenditure aggregates; it excludes so-called transfer payments, such as benefit payments and debt interest. While changes in transfers are certainly of interest and importance, the government has less direct control over spending in these areas given they are contingent on wider macroeconomic conditions e.g. unemployment and total government debt.
In terms of sources:
- The spending figures for recent years come from the latest UK Economic Accounts.
- While government current spending figures extend back to 1948, capital spending figures now only go to 1997.
- From 1947- 1997 I have therefore used previously calculated figures when the latter were available from the ONS. (The overlap between these and current figures is perfectly respectable.)
- For years before 1947 Charles Feinstein’s invaluable compilation of historic National Accounts is inevitably used.
- The full time series of spending figures to 2009 is available in Victoria Chick’s, Ann Pettifor’s and my ‘The economic consequences of Mr Osborne’; historic government debt figures are also included here; they no longer appear to be available from the Treasury – the OBR have taken over, but the rich historic detail seems to have been lost in transit, which is unfortunate.