Government: the dummy client

Peter Warburton - 19 November, 2020

In the wake of Covid-19, the UK central government - beyond that of other G7 nations - has thrown caution to the wind, raising expenditure by 33 per cent, comparing April to September 2020 with a year ago. Paradoxically, this extravagance has coincided with a drop in the volume of services delivered by the public sector, notably a 20 per cent fall in the number of GP appointments compared to January. This infers that there has been a massive increase in the cost of public sector services, which is glaringly obvious from the updated national accounts. Financial markets have dismissed this extraordinary public sector inflation as a statistical artefact that will unwind automatically, but there are good reasons to be sceptical. Government has inserted itself as a dummy client into the UK economy, making unconditional financial transfers and providing services at exorbitant cost to the taxpayer. Its exit strategy is far from clear.
Governments have often proved strange clients for commercial businesses. Meticulous in the specification of their requirements, compliant with all legislation and regulations, generally easy-going about lead times but occasionally frantic, and alternating between penny-pinching and utterly indifferent to cost. According to the annual statistical analysis of public expenditure, the UK government spent £306bn on buying goods and services from external suppliers in 2019/20, which has probably swelled to between £350bn and £400bn due to Covid-19-related spending. Total public sector spending reached £884bn in 2019-20 and the OBR’s estimated outturn for central government spending alone in 2020-21 is projected to exceed £1 trillion.  Unfortunately, in cold, hard accounting terms, there is less than nothing to show for this display of extravagance.

Consider this sobering extract from a recent report from the Institute for Government: “Social distancing requirements and other measures to reduce infections led public services to pause much of their normal day-to-day work. Non-urgent elective surgeries such as routine hip replacements were cancelled (figure 2), and there are now 3.86 million people waiting for elective treatments. GPs deferred new patients reviews and over-75s’ health checks. The magistrates’ and crown courts processed 62 per cent fewer criminal cases between March and June 2020 than in the same period in 2019. Jury trials were postponed entirely. Schools closed their doors to all but a handful of pupils – fewer than 3 per cent of pupils attended school between 24 March and 1 June. Almost all (97 per cent) care homes closed to new admissions.

The number of weekly GP appointments fell by 44 per cent between the first week of March and the first week of April (figure 1); 40 per cent fewer cases were sent to magistrates’ courts; and local authority admissions to care homes were down by more than a quarter (28 per cent) compared to the same period in 2019. Rather than accessing services as usual, people have instead sought help from friends and family – with an estimated additional 4.5m people providing unpaid care since the beginning of the pandemic – or managed, often unsuccessfully, on their own.” 

Whereas education output will have recovered substantially with the return of most pupils to school in September, health output remains in deficit. The deflator for government spending spiked to a 47 per cent annual inflation rate in Q2 (figure 3) but has moderated to 33 per cent in Q3. In principle, the termination of the furlough scheme next March will also make a large dent in this ludicrous inflation rate, but the government may choose to sponsor an employment scheme for young people as a replacement. The bloated government deflator distorts the GDP deflator, which recorded a 6.5 per cent inflation rate in the year to 2020 Q3 (figure 4), in a historic divergence from consumer price inflation. In the two major inflationary episodes of the mid-1970s and early 1980s, public sector inflation led CPI inflation higher: will history repeat itself?

Figure 1

Weekly GP appointments per working day, by type, January-August 2020

Source: Institute for Government analysis of NHS Digital, ‘Appointments in General Practice’.

Figure 2

Volume of hospital activity

Source: Institute for Government analysis of NHS England and NHS Improvement, A&E Attendances and Emergency
Admissions, Monthly Outpatient Referrals Data, & Monthly Diagnostics Data; NHS Digital, Provisional Monthly
Hospital Episode Statistics.

Figure 3

Data source: Thomson Reuters Datastream

Figure 4

Data source: Thomson Reuters Datastream

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