Dancing in the dark

Here are three things I’ve noticed recently:

1) Barney Stringer’s fascinating blog about London passing an extraordinary milestone – the population finally caught up with its 1939 peak population – from now on it will be an all-time high. London needs, Stringer notes, a wave of new schools with 133,000 additional places required in the next four years. Will these places be created?

2) John Kampfner interviewed by the Guardian about his new role in charge of the Creative Industries Federation. “We are at a dangerous moment for public funding,” Kampfner claimed. Will funding be adequate to sustain the UK’s world leadership in culture and the creative industries?

3) The Department of Health promise that from April a new £5.3bn fund will improve care for vulnerable people, preventing 160,000 A&E visits. But will this be sufficient to compensate for additional A&E visits driven by 94 out of 152 councils cutting social care spending per person since 2010?

What links these three developments?

The government, according to a recommendation made by the London Finance Commission, should distinguish between borrowing that will be used to promote growth or reduce public expenditure and thus be repaid, and other kinds of debt. If this distinction were made, the school places would be funded, arts funding would be maintained, and social care spending would prevent excessive burdens on A&E. What matters is whether the spending will either add enough to growth and consequently, tax collection or adequately reduce demands upon public services to pay for itself.

One half of this equation involves the cost of the spending, which is concerned with the price of public debt. When I discussed the fiscal position with Ben Southwood of the Adam Smith Institute on Share Radio this week, he conceded that there is no sign of an imminent debt crisis. It was the possibility of such a crisis that initially motivated the government’s austerity programme. This now appears a diminished possibility, as reflected in the low cost of UK public debt.

This means that the threshold that spending on things like schools, arts and social care has to clear to pay for itself is relatively low. “Of course,” as Chris Dillow blogged, “things will be different if borrowing costs rise sharply. If they do, though, it would come as a big surprise to the gilt market.”

We might have thought that a Conservative-led government would be willing to read market signals, while governments of all kinds would be better served by more robust tools for assessing the downstream impact of spending. What, for example, is the impact on GDP and therefore, tax collection of arts spending? Or the reduced A&E cost tomorrow of extra social care spending today?

Peter Bazalgette, chair of the Arts Council, argues that arts spending improves health, thus reducing costs falling on the NHS. Therefore, to quantify the full fiscal impact of arts spending, we need to value both what it will generate the exchequer through increased tax collection via additional GDP growth and what it will save the exchequer in the form of reduced health spending. Equally, better social care may also make people more able to work, bringing in more tax to the exchequer, as well as reducing its expenditure on A&E.

We might also be interested in distributional impacts. Reviewing how London’s population evolved from its previous peak in 1939, Stringer observes, “a deliberate policy of constraint and dispersal that reversed the growth of one of the world’s great cities”. As Gaby Hinsliff writesthat the resentment between London and the rest of Britain is turning into a poisonous debate, it’s uncomplicated to imagine an appetite for similar re-emerging. In this context, funds for London school places will be harder to find. As this happens, however, more families will be tempted to move out of London, increasing pressure on public services and driving up house prices wherever they decamp to. Which is an example of the kind of distributional impact of public spending decisions that we might wish to be able to better capture.

We have a political debate that seems ignorant of what bond markets are saying about the price of public debt alongside a policy debate under informed about the fiscal and distributional impacts of public spending raised through these markets. The chink in the dismal armour of political debate on fiscal policy that could be exploited to improve this is to have more focus on what impact might be generated by Labour’s relatively relaxed position on capital spending.

This position holds out the possibility of preserving the kind of spending revered by the London Finance Commission. But in the absence of policy tools capable of better distinguishing this spending from other spending, it will remain a political dance in the dark.