The End of the Automatic Stabilisers

An extremely radical and dangerous policy is embedded in the UK’s otherwise no-change budget. It has serious implications.

To understand it, let’s pull up this post from Sky News economics editor Edmund Conway. Government spending in the UK is broken into two major categories for management purposes – departmental expenditure limits (DEL) and annually managed expenditure (AME). DEL is determined by the regular, inter-agency Comprehensive Spending Review process and includes things that can be planned in advance, although it can be adjusted via the annual budget.

AME includes the other stuff, like the costs of the social security system, which can’t be planned in advance as they fluctuate with the behaviour of the macroeconomy, and the operational costs of defence, which can’t be planned in advance as they are driven by events, dear boy. The austerity budgets since June 2010 have mostly affected DEL, for the excellent reason that DEL is the stuff the government has discretionary control over. As a result, they have fallen very heavily on capital investmnt and construction, which I believe to explain why it’s gone so bad so quickly.

On the other hand, people like Fraser Nelson went through a phase of denying that any cuts had happened because AME went up in cash terms. “In cash terms” is a tell, of course, as part of this was just inflation, but the real point was that the UK has been experiencing the austerity trap – the budget consolidation didn’t work because it hammered the real economy, reducing tax revenues and increasing payouts to the unemployed.

Inevitably, George Osborne has drawn precisely the wrong lesson from this. AF447 economics strikes again. It’s impossible to arrive at the right treatment if your diagnosis is itself pathologically crazy. Starting in a few years’ time, he wants to get rid of AME, or rather to create a new management framework that permits of setting a cash limit on it, and Ed Conway, as a good Very Serious Person and News International employee*, has already started with the talking points – note the title of his blog post. “Uncontrolled spending” anyone?

But it is precisely the fact that AME floats that makes it worthwhile. Another way of describing the AME/DEL distinction is to say that it is the distinction between the automatic stabilisers and discretionary fiscal policy. Mike Konczal covers just how much the relatively weak stabilisers in the United States helped to relieve the recession in 2009 and how much they are now helping to restore the public finances in the recovery.

If you decide to impose cash flow controls on AME, though, how can the automatic stabiliser possibly work?

*This is relevant; during the Leveson inquiry, it became known that George Osborne recommended Andy Coulson, on Rebekah Brooks’ suggestion, to the prime minister. Osborne had previously been in trouble and had been spared the full fury of the tabloid press for some reason.

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