A billion here, a billion there - and not a word of it matters

One of the more depressing aspects of the election debate is the way numbers get tossed about on spending pledges. It is depressing from an economic perspective for three main reasons. First, there is the focus on the minutiae of taxing and spending rather than the huge numbers – and huge decisions – in public finance. Second, the emphasis is on inputs rather than outputs: how much more is to be spent rather than how well it is to be spent. Third, it ignores the great uncertainties facing the next government.

The easiest way to see the oddity of the debate is to put the numbers in context. Revenue this financial year is going to be around £670bn and spending around £740bn. The economy as a whole will have a GDP of around £1,900bn. Labour has been talking about raising an extra £7.5bn from tightening tax-avoidance and evasion, and from ending non-dom status. Even if it managed to do so, that would be only 1 per cent of its spending, or 10 per cent of the deficit. It would be like someone on average earnings, which after tax are around £21,000 a year, suddenly getting a windfall of an extra £210. It would be nice to have but not something that is going to transform the family finances. Or take the mansion tax, supposed to raise £1.2bn. That would be equivalent to an additional £50 for someone on average earnings.

The Tories are equally guilty. They have a plan to raise £1bn from cuts in pension tax relief on the highest earners to fund the removal of family homes up to £1m from inheritance tax. This is supposedly revenue neutral, though no one knows whether this would be the case. But to have as a flagship policy something that is so tiny in the context of the economy as a whole is bizarre. Inheritance tax, by the way, raises only £3.5bn and is particularly expensive to collect, while the big issue in pensions is now the imbalance between private- and public-sector pensions, something made worse by changes in policy over the past 15 years.

The emphasis on inputs rather than outputs is also a universal vice of politicians. Under the three Labour governments there was the largest sustained increase in government spending that has ever occurred in peacetime. So it became commonplace for ministers to stress that they were spending more on things, though they usually used the word “invest” rather than spend. This spree has been partially reversed, though spending now is still higher as a percentage of GDP than it was under all but the last two years of the Labour government. But now the Tories have picked up the spending baton, promising an extra £8bn for the NHS.

Emphasis on inputs is also particular to the public sector. If you buy a car or a computer you don’t care how much it cost to make it; you care about whether it works. Companies do sometimes boast about the amount they have invested in a factory – but often because they have had some sweetener from taxpayers to do so. True, it is much harder to assess quality in services than in goods, and since governments are in general providing services, it is tough to work out how well they are using the resources they have available. But it is not impossible. One of the really interesting aspects of the squeeze on public spending has been the extent to which local authorities seem to have been able to maintain, or even improve, services despite being in the front line of the cuts. How they have managed to do so is one of the under-written stories of the past five years. But it is unglamorous, and unfortunately few politicians have any experience of the detail of management. It shows in their rhetoric.

And uncertainty? It is the nature of the political debate to assume that the good times will continue to roll for ever, despite the historical experience that they are most unlikely to do so. Sometimes politicians do acknowledge uncertainty, as Chuka Umunna, the Labour shadow business secretary, did when questioned about the long-term costs of Labour’s programme. But what we don’t have is the sort of stress-testing to which regulators are now imposing on the banks.

The Office for Budget Responsibility has been monitoring the likelihood of the Coalition meeting its fiscal objectives for the past five years, and the difficulties it has met in doing so – slower economic growth initially, lower revenues but also lower interest rates – show how hard it is to “cost” political manifestos. But were one to do a realistic stress-test for the next five years, one would have to include a number of disagreeable possibilities, including that of another global recession, or at the other extreme, rapid inflation and sharply rising interest rates.

So what’s to be done?

Well, fortunately we have the Institute for Fiscal Studies monitoring the claims and counter-claims. Its cool, numerate, apolitical judgements give us as accurate a compass as the economics profession can muster, better than any of the university departments – which says something troubling about the state of economics in academia.

We also have a healthy sense of scepticism among voters about politicians’ claims, though I wish we were more numerate. If we were we would realise that in overall public finance nothing under £5bn matters, in the sense that we have a £50bn problem, not a £5bn one. However, the billions do mount up: it was the American politician Everett Dirksen who coined the phrase: “a billion here, a billion there”, though apparently he never added the “pretty soon, you’re talking real money” attributed to him.

Finally, we should remember – and remind politicians – that there is an economic cycle. What we should expect from them is reasonable competence in coping with it. Surely that is not too much to ask?

h.mcrae@independent.co.uk