Opportunities in An Age of Austerity: Smart Ways of Dealing With The UK's Fiscal Deficit

WWW.IPPR.
ORG
Opportunitiesinan
AgeofAusterity
Smartwaysofdealingwiththe
UK’sfiscaldeficit
EditedbyCareyOppenheimandTonyDolphin
November2009
©ippr2009
InstituteforPublicPolicyResearch
Challengingideas– Changingpolicy
2 ippr|OpportunitiesinanAgeofAusterity:SmartwaysofdealingwiththeUK’sfiscaldeficit
Contents
Aboutippr ............................................................................................................................. 4
Aboutthecontributors.......................................................................................................... 5
Introduction
byTonyDolphinandCareyOppenheim,ippr ....................................................................... 6
SectionOne:Cutsintheircontext
1.Thepoliticsofausterity:taxandspendingafterthecrash
byRickMuir,ippr ................................................................................................................ 10
2.Thescaleofthechallenge
byTonyDolphin,ippr ......................................................................................................... 13
3.Howcanwemeetthefiscalcostsofanageingpopulation?
byJohnHawksworth,PricewaterhouseCoopers ................................................................. 18
SectionTwo:SavingsacrossWhitehall
4.Welfarespending–Timetoreassessuniversalbenefits?
byKayteLawtonandKateStanley,ippr ............................................................................. 22
5.TheNHS– Canbettercaredeliverbettervalue?
byLizKendall,NHSConfederation..................................................................................... 26
6.Children– Spendingonpreventionservices
byPollyNeate,ActionforChildren.................................................................................... 29
7.Schools–Off-limitsforcutsornot?
bySteveBundred,AuditCommission................................................................................. 32
8.Furthereducation– Makingsmartcutsandimprovingefficiency
byPaulLawrence,KPMG.................................................................................................... 35
9.Highereducation–Canweaffordnottoinvestinhumancapital?
byClaireCallender,Birkbeck,UniversityofLondon,andDonaldEHeller,PennsylvaniaState
University..............................................................................................................................38
10.Policinginnewtimes
byRickMuir,ippr ................................................................................................................ 43
11.Defence– Arealitycheck
byGeneralLordGuthrieofCraigiebankandAndyHull,ippr ............................................. 47
12.Transport–Howdoweidentifythepriorities?
byProfessorDavidBegg,TransportTimes.......................................................................... 52
13.Localgovernment–Toughdecisionsahead
byTonyTravers,LondonSchoolofEconomics ................................................................... 55
14.Publicsectorpay–Timetosharetheprivatesector’spain?
byBridgetRosewell,Volterra .............................................................................................. 59
SectionThree:Thinkingtheunthinkable
15.Let’saskthepublic
byDeborahMattinson,Chime ............................................................................................ 62
16.Opportunitiesfornewtaxes
byPaulJohnson,FrontierEconomics ................................................................................ 65
17.Isthisthefutureanddoesitwork?LessonsfromCanada
byPeterKellner,YouGov.................................................................................................... 68
18.Thecasefortheslimmed-downstate
byPhillipBlond,ResPublica............................................................................................... 72
19.LettingScotlandandWalesgoitalone
byIainMcLean,UniversityofOxford ................................................................................. 76
Aboutippr
TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank,
producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand
sustainableworld.
Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakinginthe
UK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeand
providepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues.
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www.ippr.org.RegisteredCharityNo.800065
ThisreportwasfirstpublishedinNovember2009.©ippr2009
ISBN:9781860303302
Aboutthecontributors
ClaireCallender isProfessorofHigherEducationPolicyatBirkbeck,UniversityofLondon
andco-directoroftheBirkbeckInstituteofLifelongLearning.
DavidBegg isChairmanofTubelines,NonExecutiveDirectorofFirstGroup,Chairmanof
theNorthernWayTransportCompactandPublisherofTransportTimes.
PhillipBlond isFounderandDirectorofResPublica.
SteveBundredisChiefExecutiveoftheAuditCommission.
TonyDolphin isSeniorEconomistatippr.
GeneralLordCharlesGuthrie istheformerChiefoftheDefenceStaff.
JohnHawksworth isHeadofMacroeconomicsinPricewaterhouseCoopers’UKfirmand
editorofitsEconomicOutlookpublications.
DonaldEHeller isProfessorofEducationandSeniorScientist,andDirectoroftheCentrefor
theStudyofHigherEducation,PennsylvaniaStateUniversity.
AndyHullisaSeniorResearchFellowatippr.
PaulJohnson isaSeniorAssociateatFrontierEconomics.
PeterKellnerisajournalist,politicalcommentatorandPresidentoftheYouGovopinion
pollingorganisation.
LizKendall isDirectoroftheAmbulanceServiceNetwork,NHSConfederation.
PaulLawrence isDirector,NationalEducationAdvisory,KPMGLLP.
KayteLawton isaResearchFellowatippr.
DeborahMattinson isjointchairofChime.
IainMcLean isanOfficialFellowinPolitics,NuffieldCollegeandProfessorofPolitics,
UniversityofOxford.
RickMuir isaSeniorResearchFellowatippr.
PollyNeate isExecutiveDirectorofExternalRelationsatActionforChildren.
CareyOppenheim isCo-Directorofippr.
BridgetRosewell isChairmanofVolterraConsultingandCommissioner,2020PublicServices
Trust.
KateStanley isDirectoroftheCitizens,SocietyandEconomyProgrammeatippr.
TonyTraversisDirectoroftheGreaterLondonGroup,LondonSchoolofEconomics.
Introduction
TonyDolphinandCareyOppenheim
Nowthatpoliticiansarefacinguptotherealityofthefiscalsituation,itisagoodtimeto
examineopportunitiesforprogressivereforminthetoughfinancialenvironment–the‘age
ofausterity’–thatislikelytodominateinthepublicsectorformuchofthenextdecade.
Thisreportdoesjustthat:ipprcommissionedexpertsfromdifferentfieldseachtolookat
oneaspectoftheproblemoroneareaofpublicspending.
Theproblemandthedebate
TheUK’sfiscaldeficit(definedaspublicsectornetborrowing)was£77billioninthefirst
halfofthe2009–10fiscalyearandisontrackfortheBudget2009forecastof£175billion
(12.5percentofGrossDomesticProduct)forthefullyear.Fewthinkthedeficitcanbe
sustainedatthislevelforverylong–andtheGovernmentsetoutintheBudgetaproposal,
albeitlackingdetails,forreducingitto£97billion(5.5percentofGDP)by2013–14.This
sparkedadebate–miredinafruitlesspoliticalboxingmatchformuchofthesummer–over
whatshouldbedoneaboutthedeficit.Initially,politiciansonallsidesseemedmoreintent
onscoringpoliticalpointsthanonaddressingthecrucialissues,suchashowfastthedeficit
shouldbereduced,whatthebalancebetweenspendingcutsandtaxincreasesshouldbe
andwhatprinciplesshouldunderpinspendingreductions.
Morerecently,thequalityofthedebatehasimproved,thoughthereislittleagreementon
anythingotherthanthatthedeficitmusteventuallybereduced.Thereisnoconsensus,for
example,onwhenthefirstmeasurestocutthedeficitshouldbeimplemented.Labourand
theLiberalDemocratswarnthatcuttingthedeficittoosoonwouldendangertheeconomic
recovery(beforeithasevenstarted)–aviewthatattractsalotofsupport,andnotjust
amongpoliticalpartiesofthecentre-left.TheEconomistmagazineandthe FinancialTimes
commentatorMartinWolfhaveexpressedsimilarviews.Meanwhile,DavidCameronand
GeorgeOsbornefortheConservativesmakethecaseforearlyandmoresubstantialcutsin
thedeficitbeforetheGovernmentlosestheconfidenceofglobalbondinvestors.Mervyn
King,GovernoroftheBankofEngland,isamongthosewhohavemadethesamecase.
Lesshasbeensaidaboutthebalancebetweenusingtaxincreasesandspendingcutsto
reducethedeficit.Fornow,politiciansacrossthespectrumseemcontenttoacceptthetax
measuresproposedintheBudgetandinlastyear’sPre-BudgetReport,andinsteadtofocus
onthespendingsideoftheequation.Thishasledtosomethingofabiddingwaras
politiciansacrossthepoliticaldivideproposemeasuresthatwouldhelptoclosethefiscal
deficit.VinceCable,ShadowChancelloroftheLiberalDemocrats,wasearlyintothefray,
identifyingnineareasofpotentialsavings‘asastarttoaradicalprogrammeofreform’
(Cable2009).Theseincludedafreezeontotalpublicsectorpay,scrappingseveralmajorIT
projectsandbigcutstothedefenceprocurementbudget.GordonBrownutteredtheword
‘cuts’inaspeechtotheTUCinmid-Septemberandpromisedmeasurestoachievethe
Budgettargetofmorethanhalvingthefiscaldeficit(asashareofGDP)by2013–14.And
GeorgeOsborne,theConservatives’ShadowChancellor,usedhisspeechtohisparty’sannual
conferencetosetoutaseriesofmeasuresdesignedtoreducethedeficit,includingan
increaseinthepensionage,afreezeonpublicsectorpayforthoseearningabove£18,000a
yearandrestrictingChildTrustFundpaymentsonlytothepoorestfamilies(Osborne2009).
Themesemergingfromourexperts’contributions
Eachcontributorwasaskedtolookatoneaspectoftheproblemoroneareaofpublic
spendingandtoidentifyopportunitiesforcontributionstoreducingthedeficitthatwould
notdamageprogressiveaims.Theideawastoseeifcommonthemeswouldemergethat
couldhelpframethedeficitreductionprocess,ratherthantocomeupwitha‘topten’listof
spendingcuts,ortocomprehensivelyexamineeveryaspectofpublicspendinginthesearch
forsavings.Asaresult,potentialsavings,suchascutsintheGovernment’sITprogramme,
whichothershaveidentifiedandwhichwillalmostcertainlybeimplementedwhoeverwins
thenextelection,arenotmentionedhere.
Anumberofcommonthemesdidemerge.
1.Don’tpanic. Thereisadangerthattheclamourfordeficitreductionandpublicspending
cutswillbecomeuncontrollable.Intheabsenceofevidencethatpublicsectorborrowingis
currentlycrowdingoutprivatesectorspending(andwithmonetarypolicyalreadyatan
extremelyloosesetting),cuttingthedeficittoosoonandtooquicklycouldpreventany
economicrecoveryintheUKfromtakinghold.PeterKellnerandPhillipBlondbothargue
thatgovernmentneedstobalancetheneedforfiscalcredibilityinthemediumtermwith
supportfortheeconomyintheshortterm.
2.Planforalonghaul. Deficitreduction,wheneveritcommences,willbealongand
painfulprocess.JohnHawkswortharguesthatthelong-termcostsofanageingpopulation
intheUKnecessitateadditionalfiscaltighteningmeasures,overandabovethoseneededto
reversetheincreaseinthedeficitinthelastfewyears.TonyDolphinrunsthroughthe
arithmeticimplicitinthe2009Budgetandcalculatesthat–unlessgovernmentsareprepared
toincreasetaxesfurtherthancurrentlyplanned–departmentalspendingmighthavetobe
cutbyalmost10percentinrealtermsbetween2010–11and2013–14.Undera
ConservativeGovernmentdeterminedtoreducethedeficitmorerapidly,thisfigurecouldrise
tonearer20percent.
3.Don’truleouttaxincreases.Theprospectoftheeffectonpublicservicesofswingeing
cutsinspendingmightforcegovernmentstoreconsidertheneedforfurtherincreasesin
taxes.RickMuirsuggeststhatallthemainpoliticalpartieswillhavetolookafreshattax
measures.PaulJohnsonarguesthat,ifrevenuesaretobeincreased,itshouldbeaspartofa
long-termvisionforreformofthetaxsystem,soastoincreaseitsefficiencyandtheroleof
environmentaltaxes,andnotdoneinanadhocmanner.
4.Politicsisgoingtogettougher. Publicunderstandingofwhatismeantbypublic
spendingcuts–ortaxincreases–iscloudytosaytheleast.DeborahMattinsonandRick
Muirnotethatpollingevidencesuggeststhepublicfavourspendingcutsovertaxincreases
(thoughtherearecleardifferencesacrosspartylines).Thisappearstobebecausetheythink
spendingcanbereducedthroughefficiencysavingsthatwillnotaffectservices.Giventhe
choicebetweencutsinpublicservicesandtaxincreases,arecentpollsuggestsasmall
majorityinfavourofhighertaxes.PeterKellnerhighlightsevidencefromtheCanadian
Government’ssuccessfuldeficitreductionprogrammeinthemid-1990swhichshowsthatit
iscrucialtocarrypublicopinionandhaveaninformedpublicdebateaboutthechoices–and
theimplicationsofthosechoices.
5.Toring-fenceismisguided.Thepublichaveastrongpreferenceforcertainservices.
DeborahMattinsonpointsoutthatpollsconsistentlyshowmorethanfourinfivepeoplestill
wanttoincreasespendingontheNationalHealthService.Internationalaid,ontheother
hand,isseenasaprimecandidateforspendingcuts.Thisisaninterestingjuxtapositionfor
DavidCameronasthesearethetwoareashehasexplicitlystatedwouldbeprotectedfrom
cutsinrealfundingunderaConservativegovernment.TheLabourPartyisalsocommittedto
continuetoincreasespendingonhealth.However,whiletheremightbeastrongpolitical
caseforring-fencingcertainareasofspending,thisisunlikelytobethefairest,orthemost
effective,approachtotake.StephenBundredargues,forexample,that,whiletheremightbe
astrongcaseformakingschoolsarelativepriority,largeincreasesinrealspendinginrecent
yearsmeanthattheycannotbesparedfromcutsinanymajorprogrammeofdeficit
reduction.And,ofcourse,ring-fencinganareaofspendingaslargeastheNHSorschools
budgetaddssignificantlytothescaleofcutsrequiredelsewhere.
6.Nowherewillbeoff-limits. Governmentwillhavetomakespendingcutsand
implementreforminareasthathavepreviouslybeenseenasoff-limits.Thisislikelytolead
toconflictwithorganisationsthathavestrongpublicsupport.RickMuirsuggeststhatmajor
reformofpolicingintheUKcouldbothincreasetheeffectivenessoftheforceandsave
money,butmeasuressuchaspayingthepolicebasedonperformanceratherthanlengthof
servicewouldprovecontroversial.GeneralLordCharlesGuthrieandAndyHullcallfora
majorreviewofdefenceprocurement,theimmediatecancellationofseverallarge-scale
projectsfortheRoyalNavyandareviewofBritain’snucleardeterrent–notaseriesof
proposalsdesignedtofindfavourwiththeaverageConservativebackbencherbuta
ConservativeGovernmentdeterminedtoreducethedeficitwouldhavetolookatoptions
likethese.
BridgetRosewellarguesthatpublicsectorpayhasoutstrippedprivatesectorpayinrecent
yearsandcouldbehelddown,apolicythatcouldleadgovernmentintoconflictwithitsown
civilservice,whichitwouldprobablyshrugoff,butalsowithdoctors,teachersandnurses,
whowillfindmorepublicsupport.KayteLawtonandKateStanleypointoutthatcutting
welfarepaymentscouldinvolvemeasuressuchastaxingchildbenefitandwinterfuel
paymentsfortheelderly.Creatinglosersfromchangestothetax/benefitsystem(evenif
confinedtothoseonhigherincomes),amongchildrenandpensioners,isseldomgoodfor
thepopularityofagovernment.Butitiscertainlyanoptionworthexploring.
7.Innovateandimprove.Everyareaofpublicspendingwilloffersomeopportunities,
whetherornotthefundstheyreceivehaveincreasedrapidlyinrecentyears.IntheNHS,
whichhasseenverylargeincreasesinspending,LizKendallarguesthatradicalchangesto
servicesarerequired.Shecitestheexampleofemergencyandurgentcare,wherebold
reformcouldleadtosignificantimprovementsinpatientcareandsavingsofexpenditure.
Meanwhile,infurthereducation,whichhasdonelesswellforfundsrecently,PaulLawrence
suggeststhatsubstantialsavingscouldbemadesimplybyinefficientcollegesfollowingthe
leadoftheirmoreefficientcounterparts.AndDavidBeggarguesthattheneedforextra
revenuesshouldleadgovernmenttolookagainatthemorewidespreaduseofroad-user
charging.This,hesays,wouldrestrictdemandandhelptoeasewhatisthemostcongested
transportsysteminEurope.
8.Learnfromothers.TheCanadianexperienceofcuttingpublicspendinginthemid-
1990shasbeenwidelytoutedasamodelfortheUKgovernmenttofollow,andPeterKellner
looksatitsrelevance.Buttheremightalsobelessonstolearnclosertohome.TonyTravers
pointsoutthatlocalcouncilsacrossBritainhavealreadybeenactiveincontrollingspending
andseekingwaystoincreaserevenues–andthattheywillcontinuetoinnovateinthisarea.
Becausedifferentcouncilswilltakedifferentapproaches,thereshouldbeawiderangeof
experiencetolearnfrom.Inaddition,asIainMcLeanpointsout,thedevolutionofpowersto
theWelshAssemblyandScottishParliamentcreatestwoextrabodiesthatWestminstercan
learnfrom,especiallyiftheyaregivenmoreautonomyovertheirrevenuesandspending.
9.Redistributionisstillpossible.Althoughitismucheasiertoredistributeincomewhen
theeconomyisstrongandrevenuesarebuoyant,itisstillpossibletoredistributewhen
implementingcutsinpublicspending.KayteLawtonandKateStanleyproposeaseriesof
changestochildbenefitandthechildtaxcreditsystem,includingtaxingtheformer.This
wouldreducepublicspendingbutallowmoremoneytobechannelledtolargefamilieson
lowincomes–andsoreducechildpovertysignificantly.ClaireCallenderandDonaldEHeller
suggestendingtheblanketgovernmentsubsidyonstudentloansandreplacingitwithmore
targetedsubsidies,sothathigher-earninggraduatespayahigherrateofinterestthantheir
lower-earningcounterparts.
10.Thinklong-term.Oneofthemistakesmadebygovernmentsintentondeficit
reductioninthepasthasbeentoforgetaboutthelongtermandmakecutsthatwereeasy
toimplementintheshort.Thiscanleadtohigherspendingorlowerrevenuesinlateryears.
Spendingmoneyonpreventingproblemsdeveloping,ratherthanonclearingthemuplater,
makesfinancialsenseaswellasbeingobviouslygoodforsociety.PollyNeatemakesthe
casethattargetingresourcesatprogrammestohelpvulnerablechildrencanleadto
significantreductionsinsocialproblemslaterinlifeandLizKendallarguesforashiftinfocus
intheNHStowardsmorepreventionandearlyintervention.Similarly,government
investmentspendingcanincreasetheeconomy’sproductivepotentialandsohelpgenerate
morerevenuesinthefuture.PhillipBlond(infrastructurespendingacrosstheboard),David
Begg(spendingonthetransportnetwork)andClaireCallenderandDonaldEHeller
(spendingonhumancapitalinhighereducation)allmakethecaseforinvestmentspending
tobesparedfromcuts.
Reducingthedeficit:toughallroundbutcanbedoneinasmartway
Whatdoesthissayabouthowgovernmentshouldapproachthetaskofreducingthebudget
deficit?
Ittellsusthatitwillbeatoughprocess–toughforthepoliticiansthathavetoimplementit,
toughforthosewholosetheirjobsorseetheirworkconditionsdeteriorateasaresultof
cuts,toughforthosewhoreceivelowerbenefitsorworsepublicservices,toughforthose
whohavetopaymoreforsomepublicservices,andtoughforthosewhohavetopayhigher
taxes.
Butitalsotellsusthattherearesmartwaysandnotsocleverwaysofgoingaboutdeficit
reduction.Consideringtaxincreasesalongsidespendingcutsissmart;puttingalltheonusof
deficitreductionondepartmentalspendingisnotsoclever.Preservingspendingon
investmentandpreventativemeasuresissmart;‘salami-slicing’spendingisnotsoclever.
Settingoutthescaleofthelikelyreductioninspendingandservicestogetthepublic‘on
side’issmart;implementingswingeingcutsinspendingwithoutamandateisnotsoclever.
Beingopentomakingcutsacrossallareasofgovernmentissmart;ring-fencingcertainareas
notsoclever.Tacklingvestedinterestsandimplementingreformwhereitislongoverdueare
smart;avoidingconflictwithpopulargroupsnotsoclever.Learningfromothersissmart;
thinkingthatyouhavesomeuniqueabilitytotackletheproblemnotsoclever.Andbeing
awareofwhoisbearingthepainandprotectingthoseonlowerincomesandthevulnerable
aresmart;whilearbitraryspendingcutsandtaxincreasesarenotsoclever.
Taxincreasestohelpclosethedeficitcaneasilybedesignedtobeprogressive.Theconcept
ofmakingaprogressivecutinpublicspendingisnotsuchaneasyonetograpplewith.But
thecontributorstothisvolumehaveshownthatitispossibleforasmartgovernmentto
reducethefiscaldeficitwhileholdingtotheprinciplesthatunderpinprogressivethinking.
Youwillnotagreewitheverythingthateachonewrites–wedon’t–butwehopeyouagree
that,together,thesecontributionshelptoadvancethedebateabouthowthedeficitshould
bereduced.Thechallengeforpoliticians,intherun-uptothegeneralelection,istoliftthe
leveloftheirdebatetothatfoundhere.
CableV(2009)Tacklingthefiscalcrisis:ArecoveryplanfortheUK, September2009,London:Reform
OsborneG(2009)‘Wewillleadtheeconomyoutofcrisis’,speechbyGeorgeOsborneMP,Tuesday6
October,availableatwww.conservatives.com/News/Speeches/2009/10/George_Osborne_
We_will_lead_the_economy_out_of_crisis.aspx
1.Thepoliticsofausterity:taxandspendingafterthecrash
RickMuir
Britainisenteringanageofausterityinwhichpoliticswilllookverydifferentfromhowitdid
intheNewLabourera.Thelastdecadewasatimeofplenty:theeconomygrewrapidlyon
thebackofafinanceandpropertyboom,whilelowinterestratesfuelledanexplosionin
householdconsumption.Alargenumberofpeoplefeltalotricherastheirhomesleaptin
valueyearuponyear.
ThisprosperitygeneratedabundantresourcesfortheLabourgovernment,whichdramatically
increasedspendingonpublicservices.Whiletherichgotveryrich,thepoorbenefitedtooas
aresultoftheGovernment’staxcreditsandextraspending.Itwasthelongestperiodof
continuouseconomicgrowthinmodernBritishhistory.Ineconomicterms,wereallyhave
neverhaditsogood.
Theprospectsforthedecadeaheadcouldnotbemoredifferent.Intheaftermathofthe
collapseofthefinancialsystem,economistsexpectgrowth,onceitresumes,tobemuch
slowerthaninthelast10years.Britain’seconomywillbeburdenedwithpayingback
historicallyhighlevelsofhouseholdandgovernmentdebtwhilepreviousenginesofgrowth,
liketheCity,remaintooweaktodrivetheeconomyforwards.Whereasinthelastdecadewe
soughttofinanceScandinavian-stylepublicserviceswhiledemandingAmericanlevelsof
taxation,inthecomingdecadegovernmentsofanypartywillhavetocutspendingandraise
taxes.Weareenteringaustereanddifficulttimes.
Theywillalsobemoreinterestingtimes.Politicsisessentiallytheprocessfordecidingwho
getswhat,whenandhow.IntheeraofNewLabour,thesequestionshadasimpleand,for
Labour,anelectorallysatisfyinganswer:everybodygotmore.Everyyearthenationalpiegot
biggerandeverybodygotalargerpiece,evenifsomepeople’spiecesgrewfasterthan
others.Intimesofplenty,distributiveconflict,whetherbetweenrichandpoororbetween
thepublicandprivatesectors,isdiluted.Aquietpoliticsofconsensusprevails.
Thedecadeaheadwillbenoisierandmorepolarisedpoliticallyasthepartiesbattleoverwho
shouldpaymoreandwhoshouldgetlessinanationstrugglingtopaydownitsdebts.The
collapseoffinancialcapitalismhasalreadyrupturedthecentristpoliticsofthelastdecade.
TheLabourgovernmenthasmovedleftwards,jettisoningNewLabour’scommitmenttofree
marketorthodoxy.IthasadoptedKeynesian-stylefiscalandmonetarypolicies,nationalised
highstreetbanks,increasedtaxesontherichandtakenamuchmoreinterventionist
positiontowardsmarkets.
BycontrasttheConservatives,whileacceptingtheneedfortighterregulationandreformin
theCity,haveabandonedtheirpreviouscommitmenttomatchLabour’sspendingplans.As
theextentofthepublicdeficithasbecomeclear,theTorieshavereturnedtoMrsThatcher’s
mantraof‘goodhousekeeping’,arguingforspeedyanddeepcutsinpublicspendingtoget
thedeficitundercontrol.Atthisyear’sConservativepartyconferenceGeorgeOsborne
turnedpreviouspoliticalwisdomonitsheadbyproposingapublicsectorpayfreeze,raising
theretirementageandcuttingsomebenefits.
Recoveryordebt?
Thefirstissueofpoliticalcontentioniswhetherthemainprioritynowistoreducethepublic
deficitorsustaintheeconomicrecovery.TheConservativesandright-leaninganalystsargue
thatpublicspendingshouldbecutnowratherthanwaitinguntil2011astheGovernment
plans(Taylor2009).TheypointtothefactthatBritainhasalevelofpublicdebtunparalleled
inpeacetime,withtheGovernmentnowborrowingoneineveryfourpoundsthatitspends.
Britainwillemergefromthiscrisisin2014withmoredebtasaproportionofnationalincome
thanmostotherdevelopedcountries(Choteetal 2009).Theyalsopointtocommentsfrom
theStandard&Poor’sratingsagency,threateningtoreviewBritain’scredit-worthiness.They
areconcernedaboutapotentiallossofconfidenceamongbondtradersandinvestors,which
couldraisethecostofgovernmentborrowingandleadtoaslideinthevalueofsterling
(Taylor2009).
TheGovernmentandtheLiberalDemocratstaketheviewthatthisnightmarescenariois
highlyunlikelysolongastheTreasurysetsoutcredibleplansforthemediumtolongtermto
getthedeficitundercontrol.TheGovernmentagreesthatthelevelofdebtwillincrease
substantially,butarguesthatBritainwentintotherecessionwithasmallershareofdebtto
nationalincomethanFrance,Germany,JapanandtheUnitedStates.TheLibDemShadow
ChancellorVinceCablepointsoutthatwehavehadmuchhigherdebttoGDPratiosinthe
past,albeitinwartime(Cable2009).Manyeconomistsareconcernedthataprogrammeof
spendingcutsnowwouldputafragileeconomicrecoveryatrisk.Theypointtothelessons
oftheUnitedStatesaftertheGreatDepression,whichwentfordeficitreductiontooquickly
in1937andtippedtheeconomybackintorecession,andJapanin1997,whichrepeatedthe
USmistakeof60yearsearlier.Theypointoutthatrestoringgrowthisthebestwaytoboost
governmentrevenues,reducingtheneedforspendingcutsandtaxrisesinthelongerrun.
However,whateveritsexactscale,allsidesagreethatBritainrequiresafiscalsqueezeat
somepointtoputthepublicfinancesonasustainablepath.Theargumentthenbecomes
whatformthatsqueezeshouldtake–andmostimportantlywhoshouldfeelthepinch.
Taxrisesorspendingcuts?
Shouldthepaincomethroughtaxrisesorspendingcuts?Therightarguesthattaxrises
wouldhampereconomicgrowthandpointstoevidencethatcuttingspendingisthemost
successfulpathtofiscalconsolidation(Taylor2009).TheConservativesarecommittedto
cuttinganumberofpersonaltocuttinganumberofpersonalandbusinesstaxes,including
raisingthethresholdatwhichInheritanceTaxispaidandreducingCorporationTax.Forthe
LiberalDemocrats,VinceCablearguesthatmostofthesqueezeshouldcomeintheformof
spendingcuts,sayingthat‘directtaxescreatedisincentivestosave,workandtakeriskswhile
indirecttaxesaregenerallyregressive’(Cable2009).
Indeed,despiteearliertalkof‘Labourinvestment’versus‘Torycuts’,theGovernmentitself
anticipatesthatthreequartersofthefiscalconsolidationwillbemadeupofcutsinreal
levelsofspending.However,ontaxithasalreadydecidedtointroducehigherIncomeTaxfor
topearnersandtoincreaseNationalInsurancecontributions.Therewerenoisesatthisyear’s
Labourconferenceoffurthertaxrisestocome.Insupportoftheargumentforhighertaxes,
somecommentatorshavecastdoubtontheviewthathighertaxeconomiessufferfrom
lowergrowth.ThereisnosimplecorrelationbetweenthetaxtoGDPratioandthelevelof
economicgrowth,andindeedthehigh-taxScandinavianeconomieshavestronggrowth
records(Dolphin2009).
Thepublicissplitdownthemiddleonthisquestion:36percentfavourprioritisingspending
cutsand38percentincometaxincreases.Thepublictendtodividealongpartylinesonthis
question:Laboursupportersfavourtaxrises,whileConservativevotersfavourspendingcuts.
LiberalDemocratvotersaremoreevenlysplit,butleantowardstaxrises(PageandClark2009).
Neverthelessitisclearthattoputmostoftheburdenofconsolidationontaxriseswouldbe
politicallyunpalatable.TheInstituteforFiscalStudiespointsoutthattoprotect
departmentalbudgetstaxeswouldhavetorise(and/orbenefitsbecut)byabout£29billion
ayear,or£930perfamily,between2010and2018(Choteetal 2009).Nopartywouldbe
abletosustainsuchmassivetaxincreasespolitically.Whateverthebalancechosenbetween
taxesandspending,anygovernmentwillneedtomakespendingcuts.
Whereshouldtheaxefall?
Therearethreebroadapproachestoreducinggovernmentspending,althoughanygovernment
islikelytoadoptsomemixtureofallthree.First,thereisthetraditionalmethod,orwhathas
becomeknownas‘salamislicing’.Underthismodeleachgovernmentdepartmentisgivena
lowerbudgettolivewith,forcingministersandmanagerslowerdownthefoodchaintofind
cuts.Thismethodistemptingpoliticallybecausedecisionsaboutwhatexactlyshouldgocan
bedevolveddowntothelocallevel,absolvingministersfromsomeoftheblame.Itcanalsobe
donequickly,whichistemptingforanincominggovernmentwhichwantstogetthepainover
withwhileitcanstillblameitspredecessorforthemessitinherited.However,thisapproachis
rarelythemostprogressiveone.Itisthelessvisibleandmorevulnerablegroupsthattendto
betargetedforreasonsofpoliticalexpediency:carefortheveryelderlyintheirhomes,drug
rehabilitation,mentalhealthservices,socialwork.Marginalisedgroupswillmakelessnoise
thanthemiddleclassparentswhoseschoolsmightotherwisesufferorthestudentswhose
universityfeesmightotherwiseincrease.Salamislicingwillalsomeanareductioninthe
qualityoffrontlineservicesacrosstheboardwithoutaskingquestionsaboutwhatthe
Governmentshouldbespendingitsmoneyon.
Thesecondapproachisthatofprioritisation:governmentcouldundertakeanacrossthe
boardreviewofallaspectsofgovernmentexpenditureandstopdoingthingsthatareless
importantorineffective.ThiswastheapproachtakenbytheChretiengovernmentinCanada
whenitsuccessfullygotthefederalbudgetundercontrolinthe1990s(seePeterKellner’s
essayinthiscollection).
Thiscanbeamuchmoreprogressiveapproachbecausedecisionscanbemadetoprotect
thoseonthelowestincomesandwiththemostneedsandmakethecutsfallonthose
higheruptheincomescale.Forexample,bothGeorgeOsborneandVinceCablehave
proposedendingmiddleclassentitlementstobenefitsandtaxcredits.ThejournalistPolly
Toynbeerecentlyarguedthatifcutsaretobemadetotheeducationbudget,itwouldbe
moreprogressivetocuttheuniversitybudget,fromwhichmiddleclassfamilieslargely
benefit,ratherthantocutpre-schoolandprimaryschoolbudgetswhicharesoimportantfor
children’slifechances,particularlythosefromlowincomefamilies(Toynbee2009).
Thethirdapproachistoreformthewaypublicserviceswork.Thisisperhapstheleast
politicallysatisfactoryintheshortrun.Structuralchangesinevitablyinvolveconfrontations
withpublicsectorstaff.Theyalsobringfiscalbenefitsmuchfurtherdownthetrack,very
oftenbeyondthelifetimeofasinglegovernment.Reformsmayalsoneedtobefront-
loaded,needingmoremoneytogetthemofftheground,whichishardtojustifyduringa
timeoffiscaltightening.Nevertheless,ifitisdoneright,reformtothewayservicesworkcan
securetheholygrailofimprovingservices,whilesavingmoneyatthesametime.
Conclusion
Britishpoliticswilllookverydifferentintheyearsahead:morepolarisedideologicallyandset
againstanimposingbackdropoffiscalausterityand,potentially,greatersocialconflict.
Britishgovernmentsofanypoliticalhuewillneedtoincreasetaxesandcutpublicspending.
Thepoliticaldebatewillbeoverhowmuchfiscalconsolidationisrequired,whatthebalance
shouldbebetweenhighertaxesandspendingcutsandwhatservicesshouldbecutand
whichsocialconstituenciesprotected.
CableV(2009)Tacklingthefiscalcrisis:ArecoveryplanfortheUKLondon:Reform
ChoteR,CrawfordR,EmmersonCandTetlowG(2009) Britain’sfiscalsqueeze:thechoicesahead
London:InstituteforFiscalStudies
DolphinT(2009)‘TaxesandEconomicPerformance’,22September,London:ippr,
www.ippr.org/articles/index.asp?id=3738
PageBandClarkJ(2009)Leaders,PartiesandSpendingCuts:IpsosMORIPartyConferencesBriefing
London:IpsosMORI
TaylorC(2009)‘Howtosave£50billion’,BigPicture,Quart3,No.4,London:InstituteofDirectors
ToynbeeP(2009)‘Weneedclevercuts–notslashandburn’,TheGuardian,30September
2.Thescaleofthechallenge
TonyDolphin
TherehastobeageneralelectionintheUKbyJune2010.Thegovernmentthatisformed
afterthatelectionwillfaceanenormouschallengewhenitdrawsupplanstobringthefiscal
deficitbackdowntoasustainablelevel.
Afterjustsixmonthsofthe2009–10fiscalyear,thebudgetdeficit(definedaspublicsector
netborrowing)alreadytotals£77billionanditisontracktoreach,orevenexceed,thefull-
yeartotalof£175billionforecastintheApril2009Budget.Thiswillbetheequivalentof
12.5percentofgrossdomesticproduct(GDP)and,bysomemargin,thelargestdeficit
recordedintheUKsincetheSecondWorldWar.
EvenforsomeonefullycommittedtotheKeynesiannotionofanactivefiscalpolicyto
supporttheeconomywhenitisinrecession,thisisaneye-wateringlylargedeficitandit
cannotbesustainedatthislevelforverylongwithoutleadingtoanexplosiveincreasein
governmentdebt.Evenifthedeficitishalvedby2013–14,debtwillincreasefrom36.5per
centofGDPin2007–08toover75percentin2013–14.Withouteffortstoreducethe
deficit,debtcouldeasilyreach100percentbythemiddleofthenextdecade.Andhigher
levelsofdebtwillbeaccompaniedbyhigherinterestpayments,whichwillmeaneither
highertaxesorcutsinotherspendingtofundthem.
Thenextgovernmentwill,therefore,facetwotoughfiscaldecisions:
•Howquicklytoreducethedeficit
•Whatcombinationoftaxincreasesandspendingcutstomaketoachievethedesired
reduction.
Howtoquicklyreducethedeficit
Thecurrentgovernment’sapproachtothefirstdecisioncanbecharacterisedas‘securethe
economicrecoveryfirstandthenreducethedeficit’1;whiletheConservativeopposition
favours‘cutthedeficitnowastheonlywaytogenerateaneconomicrecovery’2.
Figure2.1.
14
Publicsectornet
borrowing(% 12
GDP)
10
Source:HMTreasury,
Budget2009 % of 8
GDP
6
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3
1
0
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Years
1. See for example Alistair Darling’s speech on 8 September (Darling 2009)

2. See David Cameron’s speech on 8 September (Cameron 2009a)
ThecurrentgovernmentsetoutitsplanfordeficitreductionintheApril2009Budget.Its
medium-termprojectionseesthefiscaldeficitbeingcutfrom£175billion(12.5percentof
GDP)in2009–10to£97billion(5.5percent)in2013–143.However,itdoesnotplanany
significantreductionin2010–11,forfearofderailinganeconomicrecoverythatwouldonly
beinitsfirstyear.
TheGovernment’splanhasbeencriticisedbyDavidCameronandGeorgeOsborne,who
havemadeitclearthataConservativegovernmentwouldcutthedeficitmorequicklyand
moreaggressively.InhisresponsetotheBudget,forexample,DavidCameronsaid,‘…the
Budgetstilldoesnotdoenoughtogetthepublicfinancesundercontrol.Intwowords,itis
completelyinadequate’(Cameron2009b).TheConservativeshaveyettospecifyexactly
whattheyregardasan‘adequate’deficitreductionplanbut,giventhelanguagetheyhave
usedtocriticisetheGovernment’splans,theywouldsurelytargetlowerdeficitsthanthose
setoutintheBudgetineveryyearfrom2010–11to2013–14.Ratherthan£97billion(5.5
percentofGDP)in2013–14,theymightaimforadeficitofaround£50billion,or3per
centofGDP(thoughthiswouldimplyareductioninthedeficitequivalentto9.5percentof
GDPinthespaceofjustfouryears–somethingneverachievedbeforeintheUK).
Thedifferentapproachesofthetwomainpartiestothespeedofdeficitreductionreflect
oneoflongest-standingdebatesineconomics.TheLabourapproachisbackedby
economistswhobelievethatfiscalpolicyshouldbeusedtosupporttheeconomybecause
monetarypolicyisprovingineffective;theConservativeapproachbyeconomistswhobelieve
thathigherdeficitsleadtohigherinterestrates,which‘crowdout’activityintheprivate
sector.WinnersoftheNobelPrizeforEconomicscanbefoundinbothcampsandthisisa
debatethatwillcontinuelongafterthepresentcrisisisover.
However,cuttingthedeficitmorequicklythanplannedinthe2009Budgetdoesappearto
berisky.Theplannedreductionoverthefouryearsbetween2009–10and2013–14is
alreadyequivalentto7percentofGDP,identicaltothereductioninthedeficitbetween
1993–94and1997–98(from7.7to0.7percentofGDP).Butthiswasachievedduringa
periodofstrongeconomicgrowthwhenconsumerandinvestmentboomswerefuelledby
risinghouseholdandcorporatedebt.Growthoverthenextfewyearsislikelytobeweaker,
makingdeficitreductionthatmuchharder.Whatismore,officialinterestratesarealreadyat
just0.5percentandtheBankofEnglandhasembarkedontheuncertainpolicyof
‘quantitativeeasing’.Thescopetoprovideafurthermonetarystimulustotheeconomyifit
weakensasaresultofatighterfiscalpolicyisextremelylimited.Ifthedeficitisreducedtoo
soonortoofast,economicgrowthcouldbehighlyanaemicoverthenextfewyears,and
insufficienttobringaboutareductioninunemployment.
Taxincreases
Theseconddecisionfacingthenextgovernmentisthecombinationoftaxincreasesand
spendingcutsthatwillbeusedtoreducethedeficit.Herethegapbetweenthetwomain
partiesis,perhapssurprisingly,smaller.Bothseemtohaveoptedformodesttaxincreases,
withspendingcutstakingmostoftheburden.
Thecurrentgovernmenthasalreadyannouncedaseriesofmeasurestoincreaserevenues
fromtaxandNationalInsurancecontributions(NICs)4.Thesemeasures,andtheeconomic
recovery,areprojectedtolifttaxrevenuesfrom33.0percentofGDPin2009–10to35.3
percentin2013–14,within1percentagepointoftheirrecentpeakvalue,relativetoGDP.
Thereis,however,scopefortaxestobeincreasedfurther.Intheearly1980s,whenthe
Conservativegovernmentaggressivelycutthefiscaldeficit,itincreasedtaxrevenuestoa
record38percentofGDP.Ithadtheadvantageofhighinflation,whichmeantthatoneway
3. A further reduction is envisaged for later years to bring the cyclically-adjusted current budget into balance by 2017–18. See HM Treasury, Budget
2009 (p.19)
4. These include increases in employee and employer national insurance contributions from 2011–12 and an additional tax rate of 50 per cent on
income above £150,000 from 2010–11.
Figure2.2.
Government 48
receipts(%of Taxes and NICs
46
GDP) Total receipts
44
Source:HM
Treasury,Budget 42
2009 40
38
36
34
32
30
20 4
3
1
0
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20
itcouldincreasetaxesina‘hidden’waywasbyfreezingincometaxallowancesandallowing
revenuestogoupaslargewageincreasesliftedpeopleintothetaxsystemandhighertax
brackets(theyrepeatedthistrickinthe1990s).Extremelylowinflationmeansthisoptionis
notavailablenow.Taxincreaseswillhavetobemoreexplicit.
Thepoliticalpartieswillbereluctanttospecifyanyparticularincreasesaheadoftheelection,
butthereareseveraloptionsthattheycouldconsiderafterit.Are-electedLabour
government,forexample,mightattemptamajorclampdownontaxavoidance,whichthe
TaxJusticeNetworksuggestscosts£25billioninlostcorporateandpersonaltaxrevenues
everyyear(Christensen2009),whiletheConservativesarereportedtobeconsideringan
increaseinthemainrateofVATto20percent,whichwouldraiseanadditional£12billionin
revenues(HMTreasury2008).Bothpartiescouldincrease‘greentaxes.Forexample,the
introductionofacarbontaxof£25pertonneofCO2 wouldraiserevenuesof£3.5billion.
However,bothanincreaseinVATandacarbontaxwouldberegressive,hittinglow-income
familiesdisproportionatelyhard.Thiswouldnotbeajustwaytoclosethedeficit.Iftaxeson
individualshavetoincrease,thefairestapproachwouldbetoincreaseincometaxrates(and
theradicaloptiontoabolishtheupperearningslimitonNationalInsurancecontributions).
Butafterthreedecadesofcuttingincometaxrates,itseemsnoneofthemainpolitical
partiesarepreparedtomakethiscase(thoughtheplannedintroductionofa50percent
rateforthoseonveryhighincomesislikelytosurvive,whoeverwinsthenextelection).
Hence,thepoliticalconsensusisthatpublicspendingwillhavetobecut.
Spendingcuts
TheBudgetforecaststotalgovernmentspending(currentandcapitalexpenditure)of£671
billionin2009–10,equivalentto47.5percentofGDP,risingto48.1percentofGDPin
2010–11,beforecomingdownto43.4percentofGDPby2013–14.Inrealterms(thatis,
afterallowingforinflation)totalspendingisprojectedtocontractby0.1percentayear
between2010–11and2013–145.
Thisisnotunprecedented.Therewerecomparableperiodsoflittletonogrowthinpublic
spendinginthe1970s,thelate80sandinthelate90s.Thedifferenceisthatinthelate80s
andlate90stheeconomywasgrowingrapidly,sospendinginareassuchasout-of-work
benefitswasfalling.Theoppositewillbetrueinthenextfewyears,makingspending
restraintthatmuchharder.Theheadlinenumbersmaskthefullscaleofthechallenge.First,
5. Real current spending increases by 0.7 per cent a year, while real capital spending contracts by 9.3 per cent a year.
Figure2.3.Real
growthintotal 12
managed 10
expenditure(%) 8
Source:HMTreasury, 6
Budget2009and % 4
author’scalculations
2
0
-2
-4
-6
2 5 8 1 4 7 0 3 6 9 2 5 8 1 4
1-7 4-7 7-7 0-8 3-8 6-8 9-9 2-9 5-9 8-9 1-0 4-0 7-0 0-1 3-1
97 7 7 8 8 8 8 9 9 9 0 0 0 1 1
1 19 19 19 19 19 19 19 19 19 20 20 20 20 20
Years
Figure2.4.
Annualchange 15
inrealspending,
10
2010–11to
2013–14(%) 5
%
Source:HMTreasury, 0
Budget2009and
-5
author’scalculations
-10
s p ep t
en l
en t
sp pita
en t
int ebt
en d
ng
fit ty
sp rren
t
sp rren
d
sp age
es
ld
ne ri
di
en
d
D
er
ca
be secu
cu
Cu
ta
an
pt
To
pt
rm
De
c
De
So
he
Ot
overthenextfewyearsdebtinterestpaymentswillgrowrapidlyasaresultoftherisein
governmentdebtcausedbylargefiscaldeficits.6 Second,therewillbesignificantincreasesin
spendingonsocialsecuritybenefitpayments(unlessentitlementsarechanged).7 Asaresult,
therewillbeasignificantsqueezeondepartmentalspending.TheBudgetplansare
consistentwithacontractionintotaldepartmentalspendingbetween2010–11and
2013–14of9percentinrealterms.Currentspendingcouldfallby6percentandcapital
spendingby25percent.
TheBudgetcontainsdetailedspendingplansonlyupto2010–11,sothetoughdecisions
aboutexactlyhowspendingwillbecuthaveyettobemade.However,seniorfiguresinthe
LabourGovernmenthavesuggestedthathealthandchildren,schoolsandfamilies,willbe
protectedfromrealcutsinspending.Thisincreasesthescaleofthecutsrequiredbyother
departments.
Evenifthisprotectiononlyextendstocurrentspending(theGovernmentcouldarguethat
thereislessneednowtobuildschoolsandhospitalsaftertheinvestmentinrecentyears),
theBudgetprojectionssuggestthatspendingbyotherdepartmentswillhavetocontractby
12percentinrealtermsbetween2010–11and2013–14.Thiscannotbeachievedby
efficiencysavingsalone.Are-electedLabourGovernmentwouldalsohavetoconsidermajor
6. The Budget projects a rise in net debt from £792 billion in 2009–10 to £1370 billion by 2013–14. Leaked HM Treasury figures suggest gross
interest payments might increase from £27 billion in 2009–10 to £64 billion in 2013–14.
7. Leaked HM Treasury figures project an increase from £166 billion in 2009–10 to £193 billion in 2013–14.
cutbacksinsomeprogrammes,includingdefence,wheretheTridentupgradeandfuture
navalprocurementwouldappeartobevulnerable.
TheproblemfacingaConservativeGovernmentthatwantedtotargetalowerfiscaldeficitin
2013–14wouldbeevengreater(assumingfornowthatitwouldnotincreasetaxrevenues
abovetheBudgetprojection).Itwouldhavetomakeevendeeperpublicspendingcutsthan
thoseimpliedbytheBudgetprojections.8 If,forexample,itwantedtotargetafiscaldeficit
of£50billionin2013–14,anddidnotcutsocialsecurityspending,itwouldhavetocutreal
departmentspendingbyalmost20percentbetween2010–11and2013–14.Andifreal
currentspendingonhealthandinternationaldevelopment–thetwodepartmentsthe
Conservativeshavesaidtheywillsparefromrealcuts–ismaintainedatits2010–11level,
realspendingbyallotherdepartments,includingdefenceandschools,willhavetobecutby
25percentonaverage.
Thisisnotgoingtobeachievedjustbyclosingdownquangosandtacklingpublicsectorpay
andpensions;indeeditmaybeimpossibletoachieveatall.ThissuggestsaConservative
Governmentwouldbeforcedtolookatfurthertaxincreases(abovethosealreadyproposed
bythepresentgovernment),increasedusercharges,cutsinsocialsecuritybenefitsandtax
credits,aswellassubstantialcutsinsomegovernmentdepartments’budgets.
Thescaleofthefiscalchallengeissogreatthat,whoeverwinsthenextelection,itwillbe
timetolookagainattheroleofthestate:toaskwhereitismosteffectiveandshouldbe
involved;toidentifyareasfromwhichitmightwithdraw;andtodebatewhichpartsof
societyshouldbeartheinevitablepainofdeficitreduction.Toughdecisionswillberequired
whichwillshapethefutureofthiscountryforthenextdecade.Theelectorateshouldbetold
beforethenextelectionhowthemajorpoliticalpartieswillapproachthesedecisions.
CameronD(2009a)‘CuttingtheCostofPolitics’,speechbyDavidCameron,8September,availableat
www.conservatives.com/News/Speeches/2009/09/David_Cameron_Cutting_the_Cost_of_Politic
s.aspx?Cameron=true
CameronD(2009b)Hansard,22April,Column252,availableat
www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090422/debtext/90422-0006.htm
ChristensenJ(2009)Ourtaxes,ourlives–Britain’sfailedtaxconsensus,TaxJusticeNetwork,
availableatwww.taxjustice.net/cms/upload/pdf/Our_taxes_our_lives_14_JUL_2009.pdf
DarlingA(2009)SpeechbytheChancelloroftheExchequer,theRtHonAlistairDarlingMP,atthe
CallaghanLecture,Cardiff,8September,availableatwww.hm-treasury.gov.uk/press_79_09.htm
HMTreasury(2008)TaxReadyReckonerandTaxReliefs,London:HMTreasury,availableatwww.hm-
treasury.gov.uk/d/pbr08_taxreadyreckoner_287.pdf
8. As a rule, for every extra 1 per cent of GDP the fiscal deficit is lower in 2013–14, an additional 2.25 per cent cut in total spending in 2013–14 is
required, and an extra 4 per cent cut in departmental spending.
3.Howcanwemeetthefiscalcostsofanageingpopulation?
JohnHawksworth
Therecentpublicdebatehasfocusedonthemedium-termchallengeofgettingUKpublic
debtbackundercontrol1,butthereisalsoalonger-termchallengeofmeetingthepotential
coststothetaxpayerofanageingpopulation.
InparallelwiththeMarch2008Budget,theTreasurypublisheditslatestreportonthelong-
termoutlookforthepublicfinancesto2057/58(thenextreportisduelaterin2009).The
reporthighlightedthat,basedonacontinuationofcurrentandfirmlyannouncedfuture
policies(forexample,forstatepensions),asignificantincreaseislikelyinage-relatedspending
onhealth,long-termcareandpensionsasashareofnationalincome(seeTable3.1).
TheTreasuryarguedthatthiswouldbeoffset,inpart,byagradualdeclineinotherspending
(particularlyprice-indexedsocialsecuritybenefitsotherthanpensions).Nonetheless,the
Treasuryprojectionsstillimpliedthattotalpublicspending,excludingdebtinterest
payments,mightrisefrom40.5percentofGDPin2007/08toaround44.5percentofGDP
in2057/58.Thisincreaseof4percentagepointsofGDPinpublicspendingwouldbe
equivalenttoaround£58billionat2009GDPvalues.
Table3.1:HMTreasurylong-termpublicspendingprojectionsatMarch2008,%ofGDP
Years 2007/08 2017/18 2027/28 2037/38 2047/48 2057/58
Health* 7.4 7.9 8.6 9.2 9.6 9.9
Long-termcare** 1.2 1.2 1.4 1.7 1.8 2.0
Statepensions*** 4.9 5.1 5.6 6.3 6.3 7.2
Education 5.0 5.6 5.8 5.6 5.5 5.6
Publicservicepensions 1.5 1.8 2.0 1.9 1.8 1.8
Totalage-relatedspending 20.1 21.7 23.4 24.7 25.0 26.6
Otherspending 20.4 19.1 18.9 18.6 18.1 18.0
Totalspending(exc.debt 40.5 40.8 42.3 43.3 43.1 44.5
interest)
*GrossNHSspending;**Excludinglong-termcareprovidedthroughtheNHS;***Definedasthe
sumofspendingontheBasicStatePension,StateSecondPension,PensionCredit,WinterFuel
Payments,Over-75TVlicencesandChristmasBonus
Source:HMTreasury2008(Table4.1)
Pressuresonspending
Thereare,ofcourse,agreatmanyuncertaintiessurroundingsuchlong-termprojections.
However,theseuncertaintiesarenotareasontodismissthepotentialchallengeofrising
age-relatedspendingastherearegoodreasonstobelievethattheestimatesinTable3.1
could,ifanything,provetobetoolow:
•AstheTreasury’s2008long-termpublicfinancereportacknowledges,itdoesnottake
intoaccountnon-demographicfactorsthatcouldhaveasignificantupwardimpacton
healthspendinginthelongterm,suchasrisingobesityandthestrongpasttrendfor
demandforhealthservicestorisemorethanproportionatelywithincomes.Analysisby
theOrganisationforEconomicCooperationandDevelopment(OECD),forexample,
suggeststhatthesenon-demographicfactorscouldaddsignificantlymoretohealth
spendingovertheperiodto2050thanthepureeffectsofageing(OECD2006)2.
1. See, for example, PwC Public Sector Research Centre (2009), which draws on the key findings from Hawksworth (2009).
2. That study projects increases in age-related public spending of around 7.2 per cent of GDP for the UK between 2005 and 2050 (including health,
long-term care and pensions).
•FollowingthePensionCommissionreportin2006,theUKgovernmenthasputin
placealong-termpensionreformsettlementthatisintendedtobelasting,includinga
gradualincreaseinstatepensionageto68by2046,withfurtherincreasesthereafter
inlinewithrisinglifeexpectancy.Theeffectsofthishigherstatepensionageand
relatedrisesinparticipationratesbyolderworkersarealreadyfactoredintothe
Treasuryprojections,sogoingmuchbeyondthiswillnotbeeasy(althoughitmaywell
provenecessaryasanalternativetofurtherlargetaxrises,asdiscussedbelow).
•Asthemedianageofthevotingpopulationincreases,thepoliticalpressurefor
additionalage-relatedspending,overandabovethatimpliedbycurrentpolicies,
seemslikelytoincreaseinfuturedecades.
•Thereareareassuchasinternationalaid,measuresaimedatchildpovertyreduction,
childcare,transportinfrastructuredevelopmentandsocialhousingwherethepressures
areforrisingspendingasashareofGDPinordertomeetlong-termpolicyobjectives.
•Ongoinggovernmenteffortstoimprovepublicsectorproductivitythroughinitiatives
suchastheOperationalEfficiencyProgrammeandthePublicValueProgrammeare
importantandneedtobeembeddedinastrongpublicsectorcultureofcontinuous
performanceimprovementbackedbyministersandtopcivilservants.Itislikely,
however,thatsuchefficiencyimprovementsareimplicitlyalreadybuiltintocurrent
governmentspendingprojectionstoasignificantdegree.
EvenifthepossibledownwardbiastoTreasuryspendingprojectionsinareaslikehealthis
discounted,however,thefactthattheprojectionsareuncertainonlyaddstothearguments
forstartingtomakeprovisionforthesepotentialcostsearlierratherthanlater.Indeed,
makingsuchprovisionscouldbeseeninpartasofferinganinsurancepolicyagainstthese
uncertainties.Ifspendingdoesnotriseasfarasprojected,someoftheseinsurance
‘premiums’couldbereturnedtofuturetaxpayersorusedtopaymoregenerouspensionsor
tofundadditionalNHSspending.Butifspendingrisesfurtherthanexpectedandnosuch
insurancehasbeentakenout,thenverylargetaxincreasesmightneedtobeimposedon
futuregenerationsofworkers,withpotentiallymuchmoredamagingeconomic
consequencesthanifearlierprovisionhadbeenmade.
AsillustratedbytheupperlineinFigure3.1below,whichincludesthefiscalcostsofageing
butassumesnofurtherpolicyactionbeyondcurrentplans,delayinaddressingthechallenge
ofageingcouldleadtoanunsustainableupwardspiralinUKpublicdebtinthelongerterm.
Figure3.1.
Alternative With ageing
120%
scenariosfor Without ageing
publicsectornet
100%
debtusing
Treasury 80%
projectionswith
andwithout 60%
costsofageing
Source:PwC 40%
projectionsusing
Treasurydata 20%
0%
22
25
28
52
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Needforfiscaltightening
Toavoidsuchanoutcome,afurthersignificantfiscaltightening(throughhighertaxesor
lowerpublicspendingthantheTreasuryprojects)willbeneededinthelongrun–overand
abovethemeasuresneededtohalttheriseinpublicdebtbetweennowand2017/18.We
have,therefore,developedamodelthatupdatestheTreasury’slong-termprojectionsfrom
March2008toallowforsubsequenteventsandthenewmedium-termTreasuryfiscal
projectionsupto2017/18,assetoutintheApril2009BudgetRedBook.Thisallowsusto
investigatedifferentoptionsformeetingalternativepublicdebtreductiontargetsgiven
thesefuturecostsofageing(thismodelwasalsousedtogeneratethedebtscenariosshown
inFigure3.1).
AssummarisedinTable3.2,ouranalysissuggeststhat,dependingontheparticulardebt
targetandtimescaleadopted,anadditionalfiscaltighteningby2017/18oftheorderof1.7
to3.0percentofGDPwouldbeneededtocoverthecostsofageing.Thistranslatesinto
around£25to43billionperannumat2009GDPvaluesoraround£1,000to£1,700on
averageperhousehold.Thisisoverandabovethecumulativediscretionaryfiscaltightening
equivalentto6.3percentofGDPalreadysetoutinthe2008Pre-BudgetReportandthe
2009Budgetinordertoreturnthecurrentbudgettobalanceby2017/18,whichisthe
Treasury’snewmedium-termoperatingrule.
Table3.2:Estimatedadditionalfiscaltighteningneededby2017/18tomeetalternativepublicsectornetdebttargets
Additionalfiscaltightening %ofGDP £billionperannum £perannum
needed at2009GDPvalues perhousehold(at
2009values)
Reducedebtto50%GDPby2047/48 1.7 25 1,000
Source:PwCanalysisbasedonHMTreasuryprojections
Note:FinalcolumnbasedonOfficeforNationalStatisticsestimatethattherearearound25millionhouseholdsintheUK.
Cashfiguresareallexpressedat2009GDPvalues.Finalcolumnisroundedtoavoidspuriousaccuracy.
Table3.2assumesthattheadditionalfiscaladjustmenttocoverthelonger-termcostsof
ageingoccursnolaterthan2017/18.Thelongerthisadjustmentispostponedbeyondthis
date,thelargeritwillneedtobe.Thescaleofthefiscaladjustmentcouldbereducedif
workinglivesandstatepensionageswereincreasedmorerapidlythancurrentgovernment
policyandTreasuryprojectionsassume3,butwhetherthemajorityofvoterswouldprefer
workinglongerinreturnforpayingsomewhatlowertaxesremainstobeseen.
Itisclear,therefore,thatmeetingthelong-termcostsofageingintheUKwillrequirea
significantfurtherfiscalsqueezeinthemediumtolongrun,aswellasareassessmentofkey
aspectsofpolicyonstatepensionsandextendingworkinglives.
Thisinevitabilityreinforcesthecasefortakingfirmactiontoreducethebudgetdeficitto
moremanageablelevelsassoonastherecessionissafelyover,soastogetthepublic
financesbackinreasonableshapebythemiddleofthenextdecadepriortohavingtoface
uptothenextfiscalchallenge:thatofanageingpopulation.
3. National Institute estimates (Barrell et al 2009) suggest that a one-year increase in working lives could reduce the budget deficit by around 1 per
cent of GDP after 10 years, which if maintained would reduce public debt by around 20 per cent of GDP after 30 years.
BarrellR,HurstIandKirbyS(2009)HowtoPayfortheCrisisorMacroeconomicimplicationsof
pensionreformLondon:NationalInstituteofEconomicandSocialResearch,May,availableat
www.niesr.ac.uk/pdf/EWLfin.pdf
HawksworthJ(2009)Withpublicdebtrisingsohigh,howcanwemeetthefiscalcostsofanageing
population? London:PricewaterhouseCoopersLLP
HMTreasury(2008)Long-termpublicfinancereport:ananalysisoffiscalsustainability, March,
availableatwww.hm-treasury.gov.uk/bud_bud08_longterm.htm
OrganisationforEconomicCooperationandDevelopment(OECD)(2006)‘ProjectingOECDHealth
andLong-termCareExpenditures:WhataretheMainDrivers?’,OECDEconomicsDepartment
WorkingPapers,No.477,Paris:OECD
PwCPublicSectorResearchCentre(2009)Dealingwithdebt:Reformingpublicservicesandnarrowing
thefiscalgap London:PwCPublicSectorResearchCentre,availableat
www.pwc.co.uk/pdf/dealing_with_debt.pdf
4.Welfarespending– Timetoreasessuniversalbenefits?
KayteLawtonandKateStanley
Inthefaceofoncomingausterity,nopublicspendingcansimplycontinuewithoutscrutiny.
Allspendingmustbesubjecttorobusttestsofprovidingpublicvalue,meetinga
demonstrableneedandcontributingtoprogressivegoals.Thismustincludespendingon
welfarebenefits.Wecannotsimplyassumethat,becausewelfareisanintrinsicpartofthe
progressivevisionofasocietythatsupportsthosewhoareworstoff,thecurrentsystem
shouldremainuntouched.Welfaremustalsobesubjecttotestsofpublicvalue.
Difficultpoliticaldecisionswillhavetobemade–anditdoesnotgetmuchtougherthan
makingchangestobenefitsfortheyoungandtheoldthatwillcreatelosers–but
governmentmighthavetogothere.Inthischapterweexaminesomeoftheoptions.
Universalbenefitsforchildren
Thestateprovidesincomeandservicestosupportfamiliesinraisingtheirchildrenbuthere
wefocusonthebig-ticketincometransfer:ChildBenefit.
ChildBenefitisthesacredcowofthewelfaresystem.Ithasveryhightake-upratesand
passionatesupportacrossthepoliticalspectrum.Itisalsoaveryeffectivevehiclefor
reducingchildpoverty,simpletoadministerandeasytounderstand.Butitdoeshave
limitationsandthetimehascometimetolookatalltheoptionsinharnessingthepowerof
ChildBenefittoreachthepoorestchildren.
TheprimaryreasonforreformingChildBenefitisthat,asauniversalbenefit,itisverypoorly
targetedandexpensivetoincrease.In2008/09ChildBenefitcost£11.3billion,makingit
oneofthemostcostlybenefitsforgovernment.
ThestructureofChildBenefitalsogeneratesinequalitybetweenlargeandsmallfamiliesby
payingalowerrateforsecondandsubsequentchildren.FromJanuary2009,theChild
Benefitratefortheeldestoronlychildwas£20aweek,comparedwith£13.20foreach
additionalchild.Povertyisconcentratedinlargerfamiliessothisisamajorchallenge
(DepartmentforWorkandPensions2009).Inaddressingthisstructuralproblem,byraising
therateofChildBenefitforsecondandsubsequentchildrentotheratepaidforfirstchildren
andsoliftingasignificantnumberofchildrenoutofpoverty,wewouldaddsignificantlyto
theChildBenefitbill.
ManycampaignersandsupportersarguethatanychangestoChildBenefit(exceptrate
increases)areundesirablebecausethebenefitisaneffectivewayofgettingmoneytopoor
familiesandanymeddlingcouldbethefirststeponaslipperyslopetoeventualdenigration.
However,thereiscross-partysupportforauniversalChildBenefitasaprincipleanditis
difficulttoimagineanypartywantingtopickthisparticularfight.Itisperfectlypossibleto
arguethatreformingChildBenefitnow,atthistimeofausterity,willinfactprotectitfor
generationstocome.
Oneveryimportantargumentmadebysupportersofthestatusquoisthatuniversalbenefits–
ofwhichChildBenefitisthemostsignificant–arecrucialinensuringsupportforthewelfare
systemasawhole,especiallyamongthebetteroff(White2003).Thisiscertainlyaserious
consideration.However,newpollingdataforipprsuggeststhatstraightforwarduniversalism
mightnotbeasnecessarytoachievingthiscollectivespiritasisoftenargued.Inapollwe
commissionedinSeptember2009ofover1,000peopleinmarginalelectoralconstituencies,45
percentofpeoplesaidtheywouldbemorelikelytovoteforapartythatpledgedthatfuture
increasesinChildBenefitwouldonlygotolowerincomefamilies.20percentofthosepolled
saidtheywouldbelesslikelytovoteforsuchaparty.Theremainingonethirdeitherdidnot
knoworsaiditwouldnotmakeanydifferencetotheirvotingdecision1.
1. Polling conducted by Brand Democracy on behalf of ippr. Brand Democracy polled 1,042 adults between 16 and 18 September 2009.
Sowhataretheoptionsforreformsthatwouldprovidepublicvalue,meetneedsand
supportprogressivegoals?Inotherwords,howdowegetgreaterbangforthetaxpayer’s
buck?Theprioritymustbetoensurethatmoremoneygetstolowerincomefamilies
especiallywhenunemploymentisrising,andwithittherateofchildpoverty.
OneoptionwouldbetotaxChildBenefitandusetheadditionalrevenuetoincreasetherate
ofBenefitpaidtosecondandsubsequentchildren.Taxationispreferabletomeans-testingas
awayofredistributingresourcesbecausetheeffectontake-upwouldbeminimised.Means-
testedbenefitstendtosufferfromrelativelylowtake-uprates.
However,theeffectoftaxingChildBenefitworth£20aweekwouldbereducethenetvalue
ofthebenefitto£16aweekforbasicratetaxpayers.Familieswithmorethantwochildren
wouldbenefitoverallbecausetheywouldreceiveahigherlevelofbenefitforthesecondand
subsequentchildren.Butfamilieswithoneortwochildrenwouldloseoutoverall.We
thereforeproposeraisingtherateofChildBenefitpaidforallchildrento£22aweek.This
wouldmeanthatbasic-ratetaxpayingfamilieswithtwochildrengainoverall.Table4.1shows
thenetweeklyvalueofChildBenefitifitwerepaidatarateof£22aweekandtaxed.
Table4.1:ThenetvalueChildBenefitwouldhaveperweekifitwereincreasedto£22andtaxed
Grossannualincomeof Scenario– under: NetvalueofChildBenefitperweek
highestearnerinafamily
Onechild Twochildren Threechildren Fourchildren
Lessthan£6,475 currentarrangements £20 £33.20 £46.40 £59.60
ipprproposals £22 £44 £66 £88
£6,475-£37,400 currentarrangements £20 £33.20 £46.40 £59.60
ipprproposals £17.60 £35.20 £52.80 £70.40
Over£37,400 currentarrangements £20 £33.20 £46.40 £59.60
ipprproposals £13.20 £26.40 £39.60 £52.80
FurtherresourcescouldbemadeavailableifeligibilitytoChildBenefitwereremovedfor
childrenaged16oroverinhigherincomefamilies.Thiswouldensurethatlow-income
familiescontinuedtoreceivefinancialsupportforchildrenover16infull-timeeducationand
training.Inthelongterm,ChildBenefitforover-16sineducationortrainingcouldbe
combinedwiththeEducationalMaintenanceAllowancetoprovideastreamlinedsystemof
financialsupportforyoungpeoplefromlow-incomefamiliesparticipatinginpost-16
educationandtraining.
Elsewhere,wehavearguedthatentitlementtoChildTaxCredit(CTC)shouldberemoved
fromfamilieswhoareonlyeligiblefortheFamilyElementofCTC(CookeandLawton2008).
Thisiscurrentlyworth£10.48aweekandispaidtoallfamilieswithchildrenwitha
householdincomeupto£50,000,meaningthatnineoutof10familiesareinreceiptofCTC.
ModellingbytheInstituteforFiscalStudieshasshownthattaperingthefamilyelementof
CTCtoarateof39percentassoonasafamily’sincomemakesthemnolongerentitledto
thechildelementofCTCwouldsaveabout£1.35billion(Breweretal2008).Thischange
wouldaffectabout2millionfamiliesandwouldmeanthatfamilieswithanincomeofabout
£27,500ormorewouldnolongerbeeligiblefortaxcredits.
Usingtheipprtax/benefitcalculatorwehavemodelledapackageofreformstoChild
Benefitwhichincludesthefollowingmeasures:
•IncreasingtherateofChildBenefitpaidtoallchildrento£22aweek
•TaxingChildBenefitbasedontheincomeofthehighestearnerinafamily
•RemovingentitlementtoChildBenefitfromyoungpeopleaged16oroverwhere
householdincomeisover£25,000.
Weestimatethatthispackagewouldremove350,000childrenfrompoverty,makinga
significantcontributiontothegoaloferadicatingchildpoverty.Thenetcostwouldbe
approximately£770million.However,ifweaddinthesavingsgeneratedbythechangesto
entitlementtoCTCforhigherincomefamilies,assetoutabove,overallsavingsof
approximately£600millioncouldbeachieved.Thesemeasurescombinedwouldredirect
limitedresourcestowheretheyaremostneededandgeneratesignificantsavingsforthe
publicpurse.
AnalternativeoptionwouldbetousetherevenueraisedfromtaxingChildBenefitto
increasetheChildElementofCTCs,insteadofincreasingtherateofChildBenefitpaidto
additionalchildren.However,thereisastrongargumentforincreasingthelevelofChild
Benefitpaidtoadditionalchildrenonthegroundsoffairnessandalsobecauseithelpsto
tackletheconcentrationofchildpovertyinlargefamilies.
Inthelongterm,amorecomprehensiveoptionwouldbetocombineChildBenefitandthe
ChildTaxCreditintoasingleprogressiveuniversalchildren’sentitlement.Thiscouldinvolvea
universal‘floor’(throughChildBenefit)withameanstest(throughtheCTC).ChildBenefit
wouldboosttheFamilyElementoftheCTCandraisethelevelofCTCacrosstheboard.This
wouldhavetheadvantageofcreatingasingleentitlementwithinastronglyprogressively
universalframework.However,itwouldalsoposesomesignificantadministrativechallenges
andcosts.Integratingthetwosystemswouldalsobeamajorchallenge.
Universalbenefitsforolderpeople
TherearearangeofuniversalbenefitsavailabletoolderpeopleofwhichtheBasicState
Pensionisbyfarthemostsignificant.Welookatthisverybrieflyhereandthenturn,briefly
also,toWinterFuelPayments.
Pensions
TheGovernmentalreadyhasplanstograduallyraisethestatepensionageto68forallby
2046.TheConservativeshaveproposedbringingforwardthisrise,increasingthestate
pensionageformento66by2016.Buttheypromisenottostartincreasingthestate
pensionageforwomenuntilatleast2020,aspercurrentgovernmentplans(Osborne2009).
Itseemssensiblethatcurrentplansforraisingthepensionageshouldbebroughtforward
and/oritshouldbeincreasedbymorethanplanned,givenincreasesinhealthylife
expectancy(Brooksetal2002).Thesavingssuchapolicywouldgeneratewouldnotbe
realisedformanyyears;however,thisdoesnotmeantheyareanylessimportanttodonow.
Elsewhereinthisvolume,JohnHawksworthhasarguedthatdemographicpressuresmean
spendingrestraintwillhavetoextendwellintothefuture;weagreethatweneedtoconsider
policiestodaythatwilllimitspendingonlyafteralonglead-intime.
WinterFuelPayments
Everyoneovertheageof60isentitledtoWinterFuelPayments(WFPs),whicharedesigned
toboosttheincomesofolderpeopleandalsoformoneelementoftheGovernment’sfuel
povertystrategy.Paymentsrangefrom£125to£400ayear,dependingonage,living
arrangementsandentitlementtootherbenefits,buteveryoneover60getssomething–
eveniftheyareinworkoronhighincomes.WFPscosttheGovernment£2.7billionin
2008/09.
Asafuelpoverty2 measure,WFPsareverypoorlytargetedwithjust12percentofrecipients
thoughttobefuel-poor.However,manywouldarguethatWFPsarenotinfactameasureto
reducefuelpovertyspecificallybutaremerelyawayofincreasingtheincomesofpensioners
usinganon-means-testedmechanism.Theuniversalentitlementto,andautomaticpayment
2. The Government defines fuel poverty as occurring when a household would have to spend more than 10 per cent of its income on all household
fuel in order to maintain an adequate level of warmth in the home. This is defined as 21 degrees Celsius in the living room and 18 degrees Celsius
in other occupied rooms (EFRA Select Committee 2009).
of,WFPsmeansthattake-upisveryhighandtheyarereceivedbythosepensionersonvery
lowincomeswhofailtoclaimtheirentitlementtoPensionCredit.
Althoughtheymaybenefitsome,itisclearthatWFPsrepresentsignificantandpoorly
targetedexpenditure,andarethereforeinneedofreforminthecurrentcontext.The
Environment,FoodandRuralAffairsSelectCommittee(2009)hasrecommendedtaxing
WFPsforbasic-ratetaxpayersandendingentitlementaltogetherforhigher-ratetaxpayers.
Thesemeasurescombinedwouldsave£250millionayear,about10percentofcurrent
spendingonWFPs,andshouldbeseenasafirststeptowardsreducingexpenditureonthis
benefit.
Entitlementtothepaymentsshouldberemovedfrompeopleaged60to64asthestate
pensionageforwomenrisesto65in2020.Morebroadly,amajor,well-targetedprogramme
ofdomesticenergyefficiencyimprovementswouldbeamoresustainablewayofreducing
fuelpoverty(andtacklingclimatechange)andmaymeanthatthelevelandentitlementto
WFPcouldberevisitedinfuture.
Conclusion
Inthechallengingtimesahead,progressivesmustbepreparedtotakeonourown
assumptionsabouttheuntouchablequalityofcertainwelfarepolicies.Wehaveonlybeen
abletoverybrieflysketchoutarationaleforreformandsomepossibilitiesforhowreforms
mightbedesigned.Butwebelievethecaseforchangeisstrong,ifnotstraightforward.A
boldgovernmentcouldimplementreformsthatwouldimprovethepowerofpoliciessuchas
ChildBenefit,theBasicStatePensionandWinterFuelPaymentstocontributetotackling
povertyandinequality,whilealsoreducingtheircost.
BrewerM,BrowneJandPhillipsD(2008)OptionsforTaxCreditReform London:InstituteforFiscal
Studies,availableatwww.barnardos.org.uk/barnados_options_for_tax_credit_reform_2.pdf
BrooksR,ReganSandRobinsonP(2002)ANewContractforRetirement London:ippr
CookeGandLawtonK(2008)WorkingOutofPoverty:Astudyofthelowpaidandthe‘working
poor’ London:ippr,availableat:www.ippr.org.uk/publicationsandreports/publication.asp?id=581
DepartmentforWorkandPensions(2009)HouseholdsBelowAverageIncome(HBAI)1994/95–
2007/08London:DepartmentforWorkandPensions
Environment,FoodandRuralAffairs(EFRA)SelectCommittee(2009)EnergyEfficiencyandFuel
Poverty,ThirdReportofSession2008-09 London:TheStationeryOffice
OsborneG(2009)‘Wewillleadtheeconomyoutofcrisis’,speechtotheConservativeParty
Conference,6October
WhiteS(2003) TheCivicMinimum:Ontherightsandobligationsofeconomiccitizenship Oxford:
OxfordUniversityPress
5.TheNHS– Canbettercaredeliverbettervalue?
LizKendall
AsthedebateragesaboutwhenandwheretheGovernmentspendingaxeshouldfall,other
publicservicesmustlookontheNationalHealthServicewithenvy.Labourandthe
ConservativesbothdeclaretheyaretherealPartyoftheNHS.Toprovethepoint,each
commitstocontinuedrealtermincreasesinNHSfunding,albeitatamuchslowerratethan
recentyears.
YettothinkthattheNHSissomehowsafefromthepublicspendingsqueezewouldbe
wrong.Theageingpopulation,theincreaseinchronicand‘lifestyle’conditionslikeheart
diseaseandobesity,risingfertilityrates(particularlyamongolderwomen)andthelikely
negativeeffectsoftherecession,especiallyforthenation’smentalhealth,willdrivemajor
increasesindemandforhealthcareintheforeseeablefuture.
Itdoesnotstopthere.Healthpricestendtorisefasterthanthoseinthewidereconomy.
Newdrugsandhealthtechnologiesaccountforanannualaverage0.5percentincreasein
theNHSbudget.NHSTrustswillalsoneedtofundthe0.5percentincreaseinemployer
NationalInsurancecontributionsfor1.3millionstafffrom2011/12ontopofthe£420
millionofinflationarypressuresbuiltintotheNHSpaysystem.Asqueezeonsocialservices
budgetswillfurtherincreasepressure,sincelesssupporttokeepolderpeoplehealthyand
livingindependentlyislikelytoleadtomoreserioushealthproblemsdeveloping,fuelling
evengreaterdemandfortheNHS.
Principlesforreform
ThesepressuresmeantheNHSneedstomakeatleast£20billionofsavingsoverthethree
yearsfrom2011,justtostandstill(Applebyetal 2009).Politiciansneedtobehonestabout
thescaleofthischallenge.Theyalsoneedaclearsetofprinciplestoguidedecisionsabout
howtheproblemwillbeaddressed.
ThefirstprinciplemustbetomaintainthefoundingcommitmentoftheNHS:that
healthcareshouldbefreeatthepointofuse,accordingtopatients’needs,nottheirability
topay.InternationalcomparisonsconsistentlyshowtheNHSisoneofthefairest,mostcost-
efficienthealthsystemsintheworld.
Thesecondprincipleshouldbetoprotect,andwhereverpossibleseektoimprove,services
forthoseingreatestneed.Despiteitsoverallfairness,the‘inversecarelaw’–wherepatients
withthegreatesthealthneedsalsohavetheworseaccesstoservices–stillbedevilstheNHS
andmustbetackledintheyearsahead.
Third,theNHSshouldshiftitsfocustowardspreventionandearlyinterventioninorderto
avoidbuildingupproblemsforthefuture.TheWanlessReport(2004)rightlyarguesthatthis
isoneofthekeystocontaininghealthcarecostsinthelongterm.
Fourth,theNHSshouldseektogivepatientsgreatersayandgreatercontrolovertheircare.
EvidencefrominitiativessuchaspersonalbudgetsandtheExpertPatientProgrammeshows
thiscanimprovepatients’outcomesandreduceserviceuseandtheoverallcostsofcare.
Finally,reformsshouldinvolveandengagepatients,thepublicandstaff.Thiswillleadto
betterdecisionsaboutNHSservices,andmoresupportforchange.Thiscanonlybeachieved
locally:aserviceaslargeandcomplexastheNHScannotbemicro-managedinWestminster
andWhitehall.
Learningfrompastexperienceisvital(NHSConfederation2009).Astrategybasedonletting
waitinglistsgrowwillnotsignificantlyreducecosts;itwillonlyproduceaone-offsavingand
therewillalsobesignificantadditionalcostsinvolvedinmanaginglongwaitinglists.Long
waitinglistsalsounderminesupportforthefoundingprinciplesoftheNHSandbuildup
problemsforthefuturebecausepatients’healthworsensastheirtreatmentisdelayed.In
addition,better-offpatientscanjumpthequeuebypayingtogoprivate,leavingthepoorest
andmostdisadvantagedpatientstosuffer.
RestructuringtheNHS–removingregionalhealthauthoritiesormergingPrimaryCareTrusts
–mayseemlikeatemptingoption.Butpreviousre-organisationshaveproducedsmaller
savingsandbenefitsthanoriginallypredicted.Thecosts–andopportunitycosts–alsotend
tobegreater.AnyonewhohasworkedintheNHSknowsthatrestructuringtendstodistract
peoplefromtherealbusinessofreformingcare.
Somecommentatorshavecalledforco-paymentstobeintroduced,forexamplecharging
peopletovisittheirGP.Theyarguethatprescriptionchargesandpaymentsfordentistry
havebeenacceptedwithoutunderminingthefoundingprinciplesoftheNHSandthatthe
poorestcouldbeprotectedbyexcludingthemfrompaying.
Evenifthoseonlowincomesareexcluded,evidencefromothercountriessuggestsmodest
co-paymentscanbeexpensivetoadministerandhavelittleornolong-termimpactonrates
ofserviceuse.Chargesthataresethighenoughtoaffectbehavioureitherresultinpatients
accessingserviceswhentheirhealthhasworsened(therebyincreasingtreatmentcosts)or
avoidingprimaryhealthcarealtogether,turningtomoreexpensiveemergencyservices
instead.
Lessbutmoreeffectiveinspectionandregulation,further‘backoffice’savings,andmore
intensiveuseofNHSbuildingsandequipment(whicharestilltoooftenrestrictedtoanine-
to-fiveworkingweek)canhelp.
One-offpayfreezeswillalsomakeacontribution,butarefarfromthepanaceapoliticians
seemtosuggest.Betterresultscouldbeachievedbyconsideringpayandpensionsasatotal
rewardpackageforstaff.However,thismustbeaddressedacrossthepublicsector,whichwill
taketime.
MoreradicalchangestoNHSservicesarenowurgentlyrequired.Frontlineservicesshouldbe
protected,buttheycannotbesetinaspic.Thegoodnewsisthatthereisagrowingbodyof
evidencethatsuggestsarelentlessfocusonimprovingthequalityofhealthcarecanalso
transformitsefficiency.Achievingthismeanssomeserviceswillneedtobespecialisedin
regionalcentres.However,thebiggerchallengeisshiftingmoreservicesoutofhospitalsand
intothecommunity,towardspreventionandearlyintervention.
Improvingemergencycare
Oneexamplewheremajorimprovementsandsavingscouldbemadeisinurgentand
emergencycare.Despiteconsiderableimprovementsinthelast10years,patientsstillfind
accessingtheseservicescomplexandconfusing,particularlyoutofhours.Theyoftendon’t
knowwhichnumbertocall–999,NHSDirectortheGP–orwhichservicesareavailablein
theirarea,otherthantheirlocalAccident&Emergency.
Atthesametime,demandforurgentandemergencyservicesisincreasing.Forexample,the
numberof999callsisgrowingbyanaverageof6.5percent(or300,000morepatients)a
year.Spendingonambulanceservicesaccountsforaround1.5percentoftheNHSbudget,
butthedecisionstakenbyambulancestaffcanleadtoaround20percentoftotal
healthcarecosts.Thenumberofjourneystohospitaliscomingdown,buttakingpatientsto
A&Eisstilltoooftentheonlyoption.
Demandforambulanceservicesisgreater,andrisingfaster,indeprivedareas.Fourpatient
groupsaccountforthreequartersoftheincreaseindemandsince2000/01:thosewhohave
sufferedfalls(oneintencallsto999isforanolderpersonwhohasfallen),breathing
problems,chestpainsandpeoplewhoareunconsciousorhavepassedout(oftenrelatedto
alcohol).Manyofthesepatientscouldbebettercaredforinthecommunityorathome,or
preventedfromrequiringhelpinthefirstplacethroughbettermanagementoftheir
conditions.
Incrementalimprovementsinindividualserviceswillnotdeliverthescaleofchangerequired.
Instead,weneedaboldvisionforchangesacrossthewholesystemofemergencyand
urgentcare(AmbulanceServiceNetwork2009).Thegoalshouldbetocreateasimple,
seamlesspointofaccesstothesystemwithanewthree-digitnumberforurgentcare–111
–tositalongside999.Betteraccessmustbecombinedwitharangeofhighquality
emergencyandurgentcareservicesavailablearoundtheclock.
Wefinallyhavethetoolstomakethishappen.NHSPathwaysisanewtelephoneassessment
systemthatcantriage999,NHSDirectandGPout-of-hourscallsconsistentlyand
appropriately.ItisownedbytheNHSandbackedbytheRoyalCollegesandBritishMedical
Association,whoareleadingitsclinicaldevelopment.
Onceassessed,patientsshouldgetthemostappropriatecarefortheirneeds.Amajor
probleminthepasthasbeenthelackofinformationaboutlocalurgentandemergencycare
servicesincludingGPs,minorinjuryandwalk-incentres,communitynurses,fallsteams,
pharmacies,mentalhealthandsocialservices,aswellasEmergencyDepartmentsand
ambulanceservices.
TheNHSnowhasthetechnologytocreatea‘realtime’directoryoflocalservices,showing
whatisavailable,whereandwhen.Crucially,thistechnologymatchespatients’needswith
theskillsofstaffineachservice.Thisnotonlymeanspatientswillgetthebestavailablecare
butthatcommissionerswillbeabletoidentifygapsinserviceprovision.Preventative
healthcarethatempowerpatientswithlong-termillnesseslikeheartdiseaseanddiabetesto
bettermanagetheirconditionwillbeakeypriorityhere.
Noneofthiswillbeeasy.Improvingservicequalityanddeliveringsavingsofthescale
requiredcannotbedonewithoutsignificantlyandpermanentlyshiftingcareoutofhospitals.
Therewillalsobebigchangesforstaff,whowillneedtoworkatdifferenttimes,indifferent
waysandindifferentplacestomeetpatients’needs.
Butwithleadershipandfocus,andbyworkingwithcliniciansandthepublic,theNHScan
deliverbettercareforpatientsandbettervalueformoneyfortaxpayers.Itshouldseizethis
opportunitywithrelish.
AmbulanceServiceNetwork(2008)Avisionforemergencyandurgentcare:theroleofambulance
services,June,London:AmbulanceServiceNetwork
ApplebyJ,CrawfordR,EmmersonC(2009)Howcoldwillitbe?ProspectsforNHSFunding2011–
2017,London:TheKing’sFundandInstituteforFiscalStudies
NHSConfederation(2009)Dealingwiththedownturn:thegreatesteverleadershipchallengeforthe
NHS?TheFutureofLeadershipPaper4,June,NHSConfederation
WanlessD(2004) Securinggoodhealthforthewholepopulation:Finalreport,February,London:HM
Treasury
6.Children– Spendingonpreventionservices
PollyNeate
Whateverwespendonservicesforourchildrenandyoungpeople,wemustspenditmore
wisely.Rightnowwearepayingahighpriceforfailingourmostvulnerablechildren,and
thereisanacuteriskthatshort-term,recession-drivendecision-makingwillmakethisworse.
Tounderstandwhy,wemustseewhatwespendnowonchildren’sservicesasaninvestment
inthefutureofoursociety.Wehavetotakebothalong-termandshort-termview:long-
termbecausethefullbenefitsforcommunitiesandsocietyasawholemaynotbefeltuntil
today’schildrenreachadulthood;short-termbecause,asparentsarealltooaware,childhood
vanishesquicklyandtheopportunitytogenuinelytransformanindividuallifethen
dramaticallyreduces.
Bothintuitivelyandthroughexperience,weknowthis.TheUKgovernmenthasset
ambitiouschildpovertytargetsandoverseenunprecedentedlevelsofinvestmentin
children’sservices.However,thisinvestmenthasnotbeenmatchedbytheimprovementin
outcomesrequiredtoturnaroundthesocialproblemsthatconcernusall.Returnson
investmenthavebeenrelativelylow.
Thosewhoworkdirectlywithchildrenandyoungpeoplealsoknowthatinterveningearly
beforeproblemsbecomeentrenchedandsevere–particularlyforthemostvulnerable
childrengrowingupinchaotic,complexandmarginalisedfamilies–isbetterforchildren,
betterforcommunities,andbetterfortheeconomyateverylevelthanspendingonpicking
upthepieces.
Yetdespiteknowingthis,westillgeneratenewandcostlyinitiativestopickupthepieces,
andattimesoffinancialpressurewehavearecordofcuttingbackevenfurtheron
preventiveearlyinterventionservices.Whenwetalkofcuts,itappearslessriskypoliticallyto
cutbackonpreventionbecausetheeffectsaredelayed.Intermsofheadlines,itmaywellbe
lessrisky.Butwecannotallowthecurrentrecessiontoshiftspendingevenfurtherfrom
whereitcanbemosteffective.
Wemustthinkintermsofinvestmentratherthanspending.Andthisisnotmerelya
semanticdistinction.
Thereturnoninvestment
InourrecentresearchreportBackingtheFuture,ActionforChildrenandtheNewEconomics
Foundationprovedthata10-yearinvestmentof£191billionintargetedinterventions,such
asworkingwithfamiliestokeepchildrenoutofthecaresystem,orimprovingparenting
skills,willdeliveranetreturnof£269billion(Akedetal 2009).Thissupportforthemost
vulnerableshouldbeaccompaniedbyaninvestmentof£428billioninuniversalchildcare
andpaidparentalleave,whichwilldeliveranetreturnof£606billionover20yearsand
eventuallyrendermanyofthetargetedinterventionsunnecessary.
Thesenumbersarehugebuttheymustbecomparedwiththe£4trillioncostover20years
ofcontinuingwiththecurrentparadigmunderwhichwecontinuetopaythecostsofwhat
arepreventablesocialproblems.Andthisfigureisconservative:weusedonlythelowest
estimateswhencountingthecostsofpreventablecrisesinhealth(suchasteenage
pregnancy,substancemisuse,mentalhealthproblemsandobesity),criminalbehaviour
includingviolentcrimeandtherisingproblemsofyoungpeoplenotineducation,
employmentortrainingandfamilybreakdown.
Furthermore,thesearemerelythefinancialreturnstotheTreasury.Analysingthesocial
returnoninvestmentofindividual-targetedearlyinterventionservicesprovidedbyActionfor
Childrenhasshownthatforevery£1investedannually,between£7.60and£9.20ofsocial
valueisgeneratedforindividuals,families,communitiesandotherlocalservices.
Despitethisevidence,itisofcoursechallengingtorecommendextrainvestmentatatime
whenbothheadlinesandbehind-the-scenesconversationsareallaboutcuts:howto
safeguardeachcompetingpotofmoneythatispartofthepublicspendingwhole.Itis
particularlychallenginggiventhatthesavingstobeachievedmayendupbenefitinga
differentdepartment,eitherinWhitehallorthetownhall,fromtheonethatpaysforthe
investment.Butweknowthatthissilomentalitydrivesinefficiency.Thisknowledgeiswhat
liesbehindthelaunchoftheTotalPlacepilots1,forexample,whichtakeaholisticview
acrossageographicareaofspendingandassesswhereitcanmosteffectivelybetargetedin
ordertoachievemaximumsustainablebenefit.
Tosupporttheideaofinvestinglargesumsinpreventativemeasures,itmaybenecessaryto
findnewwaysofencouraginginvestmentinthefuture,becausesuchashiftwillbe
fundamentalandrequireconsiderableculturalchange.ActionforChildrenandtheNew
EconomicsFoundationhaveproposedasystemof10-yearbondsinordertofundthe
upfrontinvestmentneededtoshifttoapreventativefundingmodel–upfrontbecauseyou
cannotstoppickingupthepiecesuntilpreventativeearlyinterventionhashadachanceto
work.TheevidenceinBackingtheFuture provesthatsuchaninvestmentwouldbesecure.
Andthereispotentialtomakeitworkonalocalaswellasnationalscale,engaging
communitiesintakingtheprinciplesofTotalPlaceonestepfurther.
Ashiftinobjectives
Theculturalshiftinthinkingabouthowwespendourlimitedresourcesmustbematchedby
ashiftintheobjectiveswesetforservicesforchildren.
ThedataanalysisandeconomicmodellingundertakenforBackingtheFuturewere
accompaniedbydetailedservice-levelcasestudies,assessmentsofthesocialreturnon
investmentinservices,twocitizens’juryevents–oneinvolvingyoungpeopleandone
involvingparents–andreferencetoapanelofyoungpeopleandoneofexperts.
Theresearchintoservicesdemonstratedthatyoucannotdeliverwell-beingtochildrenand
familiesinthewayyoudelivercommodities.Forvulnerablechildrenandtheirfamilies,the
pathtowell-beingisonetheymusttreadthemselves,withsupport.Positiveoutcomesare
co-producedbythosewhoneedsupportandthosewhogiveit.Forfamiliesalreadybattling
acomplexrangeofproblemsfromillhealthtosubstancemisusetopoorschoolattendance,
afinancialcrisismightbethefinalstrawbutrecoverywillnotbeachievedbyafiscal
responsealone.Itisaboutworkingalongsidefamiliesforaslongasittakes,making
apparentlysimplechangesthatbuildconfidenceandthatlast.Soaswellasinvestinginearly
intervention,weneedtounderstandwhatworks–andwhatdoesnot.
The BackingtheFuturestudyfoundthatthoseservicesthatgeneratedasignificantannual
socialreturnoninvestmenthadclearcommonfeatures.Theyworkedintensivelyandflexibly,
spendingtimeonthecausesratherthanthesymptomsofproblems.Theyfocusedonthe
widerfamilyaswellastheindividualswithinitwhoappearedtobecausingthemost
difficulty.Andtheypositionedthemselvespositively,makingthemselvesaccessibleandnon-
stigmatising,engagingfamilieswhocouldthenlinktomoretargeted,specialistservicesas
required.
Closeanalysisofsuccessfulservicesrevealssixcriticalpathwaystoachievingwell-beingfor
children:
1.Linkupandlinkin: buildconsistent,stableandtrustingrelationshipswithchildrenand
supportthemtolinkwitheachotherandthecommunity.
2.Thinkfamily: thewell-beingofchildrenandthatoftheirfamiliesisinextricablylinked.
1. Total Place is a government initiative that looks at how a ‘whole area’ approach to public services can lead to better services at less cost. There
are 13 pilot areas participating in the scheme with the aim of redesigning the way public services are planned and delivered.
3.Promotethepositive:recognisingandrewardingthethingsthatchildrenandyoung
peoplearegoodathelpsthembuildinnerresources–resilienceandselfesteem.
4.Encourageaction: childrenandyoungpeoplearenotpassiverecipientsofservicesbut
needtoseethemselvesasactivecitizenswithrightsandresponsibilities.
5.Factorinfun: serviceswillnotbeaccessibletochildrenunlesstheyrememberwhat
childhoodisabout.
6.Recognisechildren’swiderworld:peerrelationships,experiencesoffairness,freedom,
choiceandotherservices.
Followingthesepathways,serviceshavesupportedchildrenandfamiliestotransformtheir
lives.Theyalsorecoupedtheinitialinvestmentusedtofundthemwithintwotothreeyears.
Andthestatereceiveddemonstrablefinancialreturnsthroughincreasedtaxrevenue,
decreasedbenefitspayments,reducedcostsofcrimeandanti-socialbehaviour,reduced
healthcostsforchildren,andsavingstothecaresystemandotherlong-termchildcare
options.
Transformingthelegacy
Ifwecontinuewithourcurrentparadigm,therecessionwillexacerbatetheproblemswe
alreadyhave,shatteringlivesandforcingevermoredifficultdecisionsonhowtoprioritise
wherewepickupthepiecesfirst.Thisiswhythistimeofausterityisatimeofopportunity–
ifwechoosetograspit.
Ifwefailtomakeaparadigmshiftforculturalreasons–itisjusttoodifficulttolookbeyond
individualgovernmentdepartments,electioncyclesandheadlinescallingformoremoneyto
bethrownatthesymptomsofneglect–itwillbetoourshame.Thatsenseofshameisfelt
alreadybymanyinthechildren’sservicessectorbecauseweknowfromseveralwell-
publicisedstudiesjusthowpoorthewell-beingofourchildrenandyoungpeopleis
comparedtothoseinotherdevelopedcountries.Infactwelagbehindonalmostevery
measureofwell-being,butleadthepackwhenitcomestopreventablesocialproblems.
ThebeliefthatachildisluckytoliveintheUK,withitsrelativewealthandproudhistoryof
publicservices,hasbeenfundamentallychallengedinrecentyears,despitetheincreased
spendingonchildcare.Ifwegrasptheopportunityofferedbythepresentneedtorethink
ourspending,wecantransformthelegacythatthecurrentgenerationofpolicymakersand
serviceproviderswillleavebehind.
AkedJ,SteuerN,LawlorEandSprattS(2009)BackingtheFuture:Whyinvestinginchildrenisgood
forusall London:nefandActionforChildren,availableat
www.neweconomics.org/gen/z_sys_PublicationDetail.aspx?pid=293
7.Schools–Off-limitsforcutsornot?
SteveBundred
Governmentsdonotalwaysbehaveinpowerastheysaidtheywouldwhentheywerein
opposition.ButwhenTonyBlairtoldtheLabourPartyConferenceinOctober1996,‘Askme
mythreemainprioritiesforgovernmentandItellyou:education,educationandeducation’
thiswasnotjustrhetoric.SincetheelectionofNewLabourin1997,onlyhealthcanclaimto
haveprovedahigherpriorityforgovernment–bothinspendingtermsandintheattention
devotedtosystemreform–thoughwhenBlairtalkedabout‘education,education,
education’itisnowclearthatwhathereallymeantwas‘schools,schools,schools’.
Whileuniversityvice-chancellorsandheadsoffurthereducationcollegesmaycontinueto
gripeaboutallegedunder-funding,schoolheadteacherscancrediblymakenosuchclaims.
Ministersarejustifiablyproudoftheprioritytheyhaveaffordedtoschools’spendingsince
1997,becausetheyhavehonouredthepledgestheymadeandtheyhavethefiguresto
proveit.
Owingtothecommitmenttomatchtheoutgoinggovernment’sspendingplansinthefirst
twoyearsofoffice,itwasnotuntil1999/2000thatschools’spendingunderBlairand
Brownstartedtotakeoff.WhentheConservativesleftoffice,overallrevenueexpenditurein
primaryandsecondaryschoolstotalled£13.9billion.Butby2007/08,ithadincreasedby56
percentinrealterms,to£28.9billion.Thesefiguresrelatetolocalauthoritymaintained
schoolsonly.Whengovernment-fundedacademiesandcitytechnologycollegesare
included,theincreaseisevengreater.Andbecausepupilnumbersfelloverthesameperiod,
intermsoffundingperpupilthegrowthinspendingequatestoa65percentincreasein
realterms.
TheGovernmenthasbeensimilarlygenerouswithitscapitalfundingallocations.The
BuildingSchoolsfortheFuture programme,launchedinFebruary2004,isthelargestand
mostambitiousschemeofitskindanywhereintheworld.Itwasallocated£9.3billionover
thethreeyears2008/09to2010/11inthelastComprehensiveSpendingReviewandthe
aimistoseeeveryoneofthe3,500statesecondaryschoolsinEnglandrebuiltorremodelled
overthelifetimeoftheprogramme.
Hastheextramoneybeenwellspent?
Someofitundoubtedlyhas.Educationalattainmenthasrisen.Legitimatereservationsmay
beexpressedinrespectofthisclaimarising,forexample,fromconcernsaboutexamination
standardsorfromacloserlookatinequalitiesinattainmentlevels.Butthefactremainsthat
the67percentof16yearoldswhoachievedtheequivalentoffiveormoreA*toCgrades
inGCSEexaminationsin2009comfortablyexceededtheGovernment’stargetof60per
cent.
So,aswiththehealthservice,theissueisnotwhethertheperformanceofschoolshas
improvedduringtheBlairandBrownyears,butwhetherthelevelofimprovementhasbeen
commensuratewiththescaleoftheadditionalfundingthathashelpedtomakethe
improvementpossible.
Thisquestionisespeciallypertinenttoafutureinwhichpublicfinancesarebeingsqueezed
forallotherservices.Becauseifthesameimprovementcouldhavebeenachievedwithless
money,itfollowsthatitmustbepossibletoreducefundingwithoutdamagingthe
attainmentprospectsforfuturestudents.Anddependingonthescaleofanysuchreduction,
attainmentlevelscouldcontinuetoimprove.Inotherwords,ifschoolshavenotbeen
managingtheirfinanceswellintherecentpast,whateverpartyiselectedafterthenext
generalelectionitcouldcontinuetogiveprioritytoeducationwhilerealisticallyexpecting
headteachersandeducationauthoritiestodelivermoreforless.
Incentivestodeliver
IntheAuditCommission’sreportValuableLessons:Improvingeconomyandefficiencyin
schools,publishedinJuly2009,welookedathowwellschoolsaredeliveringvaluefor
moneyfromtheextraresourcestheyhavebeengiven.Andwefoundthattheincentivesto
beeconomicalandefficientareweak.
Tobeginwith,theaccountabilityframeworkforschoolsdoesnotemphasisetheneedto
providevalueformoney.Schoolgoverningbodiesoftenfailtoprovidetheconstructive
challengeonfinancialmanagementthatispartofthesupporttheyareexpectedtoprovide
toheadteachersandtheirstaff.AndalthoughOfsted(theOfficeforStandardsinEducation,
Children’sServicesandSkills)assessesvalueformoneyundertheleadershipand
managementcomponentofitsschoolinspections,itacknowledgesthatitsjudgementshave
inthepasttendedtofocusmoreonoveralleffectivenessthanoneconomyorefficiency.
Ofstedplanstogiveahigherprioritytovalueformoneyinthefuture.
Inaddition,althoughefficiencysavingstargetsarecommonplacethroughoutthepublic
sectortheywereonlyincorporatedintoschools’fundingsettlementsin2008/09.Notall
schoolsareawareoftheassumedefficiencygain,whichhasresultedinthegrowthinschool
spendingthisyearbeinglessthatitwouldotherwisehavebeen.Andthereisnorequirement
forschoolstoreporttoanyoneonwhethergreaterefficiencyisactuallybeingachieved.They
arerequiredtoundertakeaself-evaluationagainsttheDepartmentforChildren,Schoolsand
Families’(DSCF)FinancialManagementStandardinSchools(FMSiS)andcompliancewith
thisstandardisnowmandatory.ButtheFMSiSfocusesonprocessesratherthanthe
achievementofeconomyandefficiency.Asoneheadteacherwespoketoputit:‘it’seasyto
havegooddocumentationforbaddecisionmaking’.
TheValuableLessonsreportwasbasedonsubstantialdataanalysis,aliteraturereviewanda
seriesofcasestudyvisitsandinterviews.Wevisited23schoolsinsevencouncilareasand
conductedinterviewswith60individualsinschoolsand24officersincouncils.Wefound
thatbecausemoneyhasbeenplentifulinrecentyears,andbecausetheaccountability
frameworkwithinwhichschoolsoperatedoesnotprovidestrongincentivesforthemto
ensurethatitiswellspent,headteachersandschoolgovernorsoftenhavelittleknowledge
ofhowtheirunitcostscomparewiththoseofsimilarsizedschoolselsewhere.
DCSFencouragesschools,throughtheFMSiS,tobenchmarktheircosts.Itprovidesa
nationalbenchmarkingwebsitewhichenablesthemtodosobutonlyaroundhalfofall
schoolsvisitedthissiteintheyeartoJuly2008.Wealsofoundthattherearesome
weaknessesinthefinancialinformationmadeavailabletoschoolsbyDCSFandbylocal
councilsandthatintheirmanagementofkeyresources,suchasthedeploymentofstaff,
schoolsdonotalwaysgivefullconsiderationtopossiblealternativeapproaches,or
understandwhatthefinancialimplicationsofthesealternativesmightbe.
Decisionsaboutthedeploymentofstaffarecriticaltoensuringbothvalueformoneyand
betterperformanceinschoolsandtherehavebeenmajorchangesinrecentyearsintheway
inwhichstaffresourcesareused.Since1997,teachernumbersinEnglandhavegrownby
32,000,buttherearealso100,000moreteachingassistantsand70,000moresupportstaff.
Overthesameperiodpupilnumbersfellby80,000.Nodoubttheintentionbehindthese
changeshasbeentodriveimprovedperformancebyreducingpupil/teacherratiosand
freeingupteachertimecurrentlyspentonnon-teachingtasks.Butfewschoolgoverning
bodieshavegenuinelyprobedthevalueformoneyofthesedecisions.
Inthesecircumstances,itwouldbeastonishingifsavingsinschoolscouldnotbeachieved
withoutdamagetotheeducationtheyprovide.AndtheCommission’sreportpointedtoa
numberofareasinwhichthiswouldbepossible,basedontheexperienceofthosewhohave
sofarbeenactiveinprioritisingvalueformoneyinthewayinwhichtheymanage.
Forexample,wefoundthatbetween1999/2000and2007/08expenditurebyschoolson
goodsandservicesincreasedfrom£4.0billionto£6.8billion,butthereweresignificant
variationsinthecostsincurredonindividualelementsofthis,whencomparingschoolsof
similarsizesinsimilarareas.Fortheitemswereviewed,morethan80percentofprimary
andsecondaryschoolswereintheupperquartileofperpupilexpenditure,relativetotheir
statisticalneighbours,foratleastoneitem.
Betterrunschoolsarealreadyshowingwhatcanbedone.Oneprimaryschoolwelookedat
savedover£133,000,representingjustover2percentofitsrevenuebudget,bymoving
fromacouncil’stradedcaretakingservicetoin-houseprovision.Andinaggregate,we
estimatedonthebasisofsomeconservativeassumptionsthatsavingsofmorethan£400
millionarepossiblefromimprovedprocurementofgoodsandservices.
Eventhisfigureissmallincomparisonwiththepotentialsavingfromthefundingthat
schoolshavechosennottospend,buttoholdontoinstead.Schoolbalancesincreasedfrom
£680millionin1999/2000tomorethan£1.76billionin2007/08.Inrealtermsthis
representsanincreaseof79percentforprimaryschoolsand197percentinsecondary
schools–farmorethantherealincreaseinoverallfundingforschoolsoverthesameperiod.
In2007/08alone,balancesinsecondaryschoolsincreasedinrealtermsby22percentand
inprimaryschoolsby7percent.
DCSFguidancesuggeststhataprimaryschoolshouldholdnomorethan8percentofits
annualincomeinreserveandasecondaryschoolnomorethan5percent.Butnearly40per
centofschoolshavebalancesthatexceedthesesuggestedmaximumlevels.Ourreport
madethepointthathoardingcashintendedforeducationispoorvalueformoney.Andwe
concludedthatmorethan£500millionofthereservescurrentlybeingheldbyschools
shouldbereleased.
Whileschoolsaresittingonlargefinancialreservesthattheyapparentlydonotneeditwill
bedifficulttopersuademanagersofother,morecash-strapped,servicesthatspendingcuts
arenecessary.Therearethereforegoodpoliticalreasons,aswellasastrongfiscalcase,for
arguingthatschoolsshouldnotbeoff-limitswhendecisionshavetobemadeaboutwhere
thecutsshouldoccur.
Thisisnottosuggestthatthepriorityattachedtoeducationspendingoverthelastdecade
shouldbereversed.Itarguesmerelythat,foranyfavouredservice,protectionfromspending
cutsmustberelativeandnotabsolute.
Governmentsareentitledtohavespendingpriorities.Indeeditisessentialthattheydo.The
prioritythathasbeenaffordedtoeducationduringtheBlairandBrownyearshasdelivered
realbenefits.Andinthefuture,ensuringgoodeducationforouryoungpeoplewillcontinue
tobevitaltooureconomicprosperityandgeneralwellbeing.
Butthetwoservicesthathaveexperiencedthebiggestincreasesinfundingsince1997,
healthandeducation,haveinconsequencebeenundertheleastpressuretodelivervaluefor
money.Itdefiescredulity,therefore,tosuggestthatgreaterefficienciescannotbefound
fromtheseservices,orthattheyaretobefoundonlyinbackofficefunctions.Theworkof
theAuditCommissionhasalreadyidentifiedtheextenttowhichsavingsinschoolsare
possiblewithoutdamagetoeducationservices.
Soinanageofausterity,spendinginschoolsmusttakeitsplacealongsideotherservicesas
acandidateforreduction.AndthisisnodoubtwhyeventheSchoolsSecretary,EdBalls,
announcedinSeptember2009thatschoolbudgetsmightbecutby£2billionafter2011.
AuditCommission(2009)ValuableLessons:Improvingeconomyandefficiencyinschools London:
AuditCommission,availableat:www.audit-commission.gov.uk/nationalstudies/localgov/
Pages/valuablelessons.aspx#downloads
8.Furthereducation– Makingsmartcutsandimprovingefficiency
PaulLawrence
Politicalleadershaveidentifiedtheinevitabilityofcutsinpublicspendingwhile
simultaneouslygivingassurancesofprotectionforfrontlineworkersineducationandhealth.
Thischapterarguesthatinfurthereducation(FE)thereisconsiderablescopeforcuts
alongsideimprovementinservice,withthecutsinsomecircumstancesactingasacatalyst
forbetterpractice.
Cutsinfundingaremeasurablebytheirverynature.Cutsinservice,ithasbeensuggestedby
somecollegeprincipals,arebynomeansasmeasurable,orinevitable.BelowIidentifythree
broadareaswhere‘smartcuts’couldbemadewithoutfundamentaldamagetothesector:
attitudeandbehaviouralchange;efficiencygains;andreorganisationsandpartnerships.
Potentialefficiencygains
ThereisastrongfeelingwithintheFEsectorthattherearesomeefficiencygainstherefor
thetaking.Duringtheweekcommencing7September2009,20FEprincipalswere
contactedbyKPMGfortheirviewsonthelevelsoffuturefundinginthesector.Their
unanimousviewwasthatthe‘inevitablecuts’wouldnotbeconfinedtoquangosorNon-
DepartmentalPublicBodies(NDPBs)(althoughupto71suchbodieshaveadirectlinkto
aspectsofFE).Theprincipalshadpositionedtheircollegesforcutsofbetween5and15per
centinrealterms.
Ifcutsaresmarttheywillbedesignedtoprotectmostbutnotallfrontlinedeliverers.The
sector’scurrentpaycostbenchmarkaverages63percent(measuredaspaycostasa
percentageofcollegeincome)butwouldbelowerifsomecollegesdidnothavesuchhigh
ratios–upto75percentforsomegeneralfurthereducation(GFE)colleges.Thisneedsto
beaddressed.
Implementingcutsrequiresaseriesofreorganisationsifefficienciesaretobeachieved.There
isagrowingopinionacrossthesectorasawholethattherearetoomanycolleges,aview
sharedbymanyprincipals(andall20referredtoabove).Fewercollegeswouldleadto
increasedefficiencies,raisedqualityandpositivebenefitsforlearners.
Mergersarenowconsideredindividuallyontheirownmerits.‘Themergeraslastresort’
philosophydescribedinModelsforSuccess(DIUS2008)isnolongerthemessage.If
collegeswanttomergenowthereneedstobeastrongbusinessbasistothecase–plansfor
futuregrowth,morefull-costcourses,andgreateremployerengagement.
Ifmergerisnotaviablebusinessoptiontosaveandimproveacollege,failingcolleges
shouldbeallowedtoclose.Thismightsoundlikeaharshsuggestionbutconsiderthereality
of‘failing’colleges:highunitcosts,lowperformance,poorequipment,poorOfstedreports
andanoveralllackofattractivenesstolearners.Analysisofindividuallearnerrecordsshows
thatfull-timelearnersinFEwilltravellargedistancesfromtheirhomeforprovisionthatis
betterqualitythanisonofferattheirlocalcollege.InmorethanfiveareasoutsideLondon
thereisevidenceofalmost50percentmigrationbyfull-time16-to19-year-oldFElearners.
Collegesareimportanttothelocalareaforlearningandtrainingpurposesbutalsoforsocial
andcommunityreasons.Onewaytoencouragethisisbygivinggroupsofefficientlocal
collegestheirown‘sub-branding’,wherepossibleusingpartnershipswithotherproviders,
includingthethirdsector.Thisresultsinacommonstrategicmessage,lowerunitcostanda
greaterfocusonarea-wideneeds.
Thereareotherwaystoachieveefficiencygains.Oneisthroughformalcollaboration,
contractuallyboundwithformallyagreedmilestonesandtimescales.Thisismuchdiscussed
butthereareveryfewactualexamples.Thereisabigopportunityforsuccessfulcollegesand
otherstrongproviderstoaidtherestofthesectorandimproveperformance.Whyisthisnot
happening?Itisnotforlackofwillingnessonbehalfofthosecolleges.Someofthebarriers
andotherdisincentivesneedtobemoreopenlyidentified,challengedandremedied.
TheFEsectorisstructurallydiverseintermsofthetypesofcollegesitcontains.Inaddition
tosixthformcolleges(SFCs)andgeneralfurthereducationcolleges(GFEs),thereare
specialistcolleges–forexampleinartanddesign,music,andforstudentswithlearning
difficultiesanddisabilities.SixthformcollegesarepredominantlyA-levelproviders,while
GFEstrytocoverbetween13and15sectorsubjectareas.ThesmallerGFEcollegesoften
contendwithlowlearnernumberspergroupinthe16to19agerange,highunitcostsand
insufficientfundstoinvestinemployerengagement.Thereisspaceforafurther,less
ambitiouskindofcollege,withavocationalemphasisonfourorfivekeysubjectareas
relatingtolocalemployerneeds.Theseemployerscouldbeapproachedforsupportto
provideequipmentandevensmall-scalecapitalhelp.SomeRegionalDevelopmentAgencies
arealreadyactivelyconsideringthisoption.TheM4corridorisoneobviousgeographical
focus.
Anewapproachtohumanresources(HR)wouldalsobenefitthesector,sothateach
college’sstaffingisrelevantforwhatitoritscollegegroupwantstodeliver.Staffing
structuresalsoneedtoreflectthedifferentsegmentsofwhatFEcollegesdeliverintermsof
typeofcontractandpaybyrecognisingthedifferentmarginsthateachsegmentgenerates
aswellasthedifferingdeliverystylesneeded.ExpertisefromtheprivatesectortomakeHR
structuresmoremodernandrealistichasalreadybeenpositivelydemonstratedatanumber
ofcolleges(forexample,CornwallCollege).Attitudechangeinthisarea,onthepartofsome
governorsandsomeseniorleaders,isneededbeforechangeisputintoactiononalarge
scale.
Reformingfunding
Thereisanoptiontomakechangestothefundingmethodology,too.Apartfrommaking
cutstothelevelsoffundingperqualification,itwouldmakesensetoofferopportunitiesfor
theverybestproviders(inefficiencyterms)tobidagainin-yearformoreplaces–atalower
unitcost.Thiswouldencourageformalpartnershipsbetweenmoreandlessefficientcolleges
andreducecostsbydrivingdownfailureandnon-completionratesaswellasincentivising
qualityimprovements.Moreradically,considerationcouldbegiventofundingonlythose
providerswithaGoodorOutstandingintheirlastOfstedinspection–highqualitycorrelates
stronglywithhighretentionandsuccessfuloutcomes.Toconcentrateresourcesinthis
mannerwouldreducewasteandallowthefundingfreeduptobeinvestedintargeted
provisionforyoungpeoplenotineducation,employmentortraining(‘NEETs’)andother
hard-to-accessgroups.
Itmayalsobetimetoconsidercompetitivefunding:awardingbatchesoffundingbasedona
college’sabilitytodelivervalueformoney.Tescosellsitsbreadatamuchlowerpricethan
thecornershopbecauseitsellsmuchmoreandgenerateshigherdemand.The‘price’ofa
NationalVocationalQualification(NVQ)isthesamewhateverthescaleorqualityofthe
provider(oritsefficiencylevel).
Reorganisationofback-officedeliveryfunctionsisfrequentlydiscussedbutproblemsof
scale,time,ego,fear,traditionalthinking,thecurrentrealitythat‘itsimplydoesn’thaveto
bedoneyet’,aswellastheabsenceofmodelsthatarereallyeasytocopymeansthatpull-
throughislimited.Thescaleofcutsthatthesectorwillfacewillincreasetheurgencyto
managechangewell.Thebestwillbedonebythosewhohaveacceptedwhatishappening
andaremakingaplanned,proactivestrategynow.
Thereareplentyofotherreorganisationsandchangesthatwillenablesmartcutsandraise
efficiencies,especiallyafterchangesaremadetoadministrationinthesector.
Thefinalconsiderationispreciselyhowtoensurethechangesaremade.WhattheFEsector
reallyneedsisaclearlydefinedinterventionistframework,underpinnedbygreaterclarityon
corevalues.Somekeyprinciplesshouldinclude:learnersdeservehighqualityopportunities
andwidechoice;mediocrityandunder-performanceshouldnotbetolerated;recoveryshould
happenquicklyornotatall.Havingsuchasmallcollectionofimportantprincipleswould
helpclarifyforthesuccessorbodiestotheLearningandSkillsCouncilpreciselywhat
underpinstheFEsectorandwhatthetargetsare.Thiswouldensurethatchangehappened
earlier,thatinefficiencieswererootedoutandpoorpracticewouldnotbeallowedto
continue.
Inthecaseoffinancialpoorperformance,itwouldmakesensetocompletelyabolishall
exceptionalsupportfundingforFEcollegesthatcomesfromthepublicsectorpurse.Instead,
acollegeinneedwouldreceiveexceptionalsupportinmanagementandleadershipfroma
Grade1collegeasapartofaformalcollaborationfora12monthminimumperiod(there
wouldbeafeefortheprovidingcollege,butlessthanthecostofexceptionalsupport).
Privatesectorinterventioncouldalsobeconsideredtoprovideaformalmanagedturnaround
service,thoughbarriers(suchasVATcharges)wouldhavetoberemoved.Collegeswould
recoverbyimprovingtheirpractice,supportedbycommercialloansifnecessary.Wecannot
affordforfailingcollegesandtheirconsequentlackofinvestmenttoriskmeetinglearners’
needsandimprovingthecountry’sskillsbase.Ifsuchsuitablerecoverycouldnotbe
achievedinsixmonthsthenamoreradicalsolutionwouldhavetobeimplemented.
Thereisscopetomakethemostefficiencygainsfromthemostinefficientproviders.Thekey
isactuallymakingthingshappenandthisistherolethatthenewGovernmentanditsagents
musttakeonafternextyear’sGeneralElection,whatevertheoutcome.
Conclusion
Smartcutsinfurthereducation,potentiallyof£1billion,couldbeachievedrelativelyquickly
alongsideimprovedefficiency.Thebestcollegeshavealreadydecidedthatefficiencygains
ofupto15percentwillbeneededandhavepositionedthemselvesaccordingly.The
opportunitiesareevengreaterinthelesssuccessfulcollegesbutwillonlybeachievedbya
tougher,moreinterventionistapproach.Ithasbeentooeasyforsomecollegestobe
inefficientfortoolong,damagingopportunitiesfortheirlearners.
Informedinterventionshouldbethewayforward,guidedbytheexpertiseofferedbythe
157Groupofcollegeprincipals,theAssociationofCollegesandothercollegegroups,and
someprivateproviderorganisations,consultingdirectlywithgovernment.Itispossibleto
makecutsandefficiencygainswithoutdamagingFEprovision.Elementsofthesectormust
nowbeforced–becausepersuasionhasnotworked–tomodernise,asthebestdeliverers
havealready.Thealternativeisclosure.
DepartmentforInnovation,UniversitiesandSkills(2008) FurtherEducationColleges–Modelsfor
Success London:DIUS
9.Highereducation–Canweaffordnottoinvestinhumancapital?
ClaireCallenderandDonaldEHeller
GovernmentexpenditureonhighereducationhasrisensteadilyinEnglandsinceLabour
cametopowerin1997.Theeconomicbenefitsforourglobalisedknowledgeeconomyof
investinginhighereducationarewellknown.Highereducationiscentraltoprovidingthe
flexibleskillsrequiredfortomorrow’sworkforceandwillbeintegraltooureconomicrecovery.
However,thecurrentfiscalandpoliticalrealitiesmakecutsinpublicspendingonhigher
educationverylikely.Willthisnecessarilymeanareductionininvestmentinhumancapital?
Thefiscalconstraintsarealreadybeingfelt.Tocurtailpublicspendingonhighereducation,
theGovernmentlimitedthenumberofnewundergraduatestudentsenteringuniversitiesin
thecurrentacademicyear.ThissqueezeonuniversityplacesunderminestheGovernment’s
desiretoexpandandwidenparticipation–hallmarksoftheirhighereducationpolicies.An
estimated132,000eligiblestudentsarewithoutauniversityplace(UCAS2009).Thosemost
affectedarestudentswithlowerA-levelresultsand‘non-traditional’students,whoarethe
primaryfocusoftheGovernment’swideningparticipationstrategies.
Theinitialtriggerforthiscaponstudentplaceswasthespirallingcostsofstudentfinancial
support.In2005/06,beforethesystemwasreformed,financialsupportabsorbed35per
centoftotalannualpublicexpenditureonhighereducation,atacostof£3.5billion.By
2010/11,thisisprojectedtoincreaseto52percentatacostof£9.8billion(DIUS2008).1
Suchafinancialcommitmentisnotsustainable.
Thepolicyobjectivesandchallengesaretwofold:
1.Howtoreducepublicspendingonhighereducationwithoutunderminingthequalityof
provision,whilesafeguardingandwideningparticipationlevels.
2.Howtopreservehighereducationrevenueswithoutincreasingpublicexpenditure.
Thischapterconcentratesonstudentfinancialsupportforfull-timeundergraduatesstudying
atuniversitiesinEngland,andspecificallyonstudentloans.Itmakesnoproposalsfor
changestothecurrentsystemofGovernment-fundedstudentmaintenancegrantsor
institutionalbursaries.2
The2004HigherEducationAct,whichcameintoforcein2006/07,allowedEnglishhigher
educationinstitutionstochargeupto£3,000(£3,225in2009/10)perannumfortheirfull-
timeundergraduatecourses.Allfull-timeundergraduates,irrespectiveoftheirfamily’s
income,nowpaytuitionfees.TheycantakeoutaGovernment-fundedstudentloantocover
theirfees,whichtheyrepayaftergraduation.Andtheycangetaloanfortheirlivingcosts,a
provisionwhichpre-datesthe2004Act.3
Concernsabouttheeffectofthe2004reformsonwideningparticipationpromptedanew
packageoffinancialsupportforlow-incomestudents.First,Government-fundedmeans-
testedmaintenancegrantswerere-introducedhavingbeenabolishedin1998.Second,
highereducationinstitutionschargingtuitionfeesabove£2,906areobligedtogivebursaries
ofatleast£319tostudentsreceivingfullgrants.
1. Government figures show that by 2010/11, the cost of providing student loans for tuition and living costs will be over £1.5 billion per annum
while the cost of grants will be another £1.2 billion. The capital costs of providing cash for issuing student loans, net of anticipated receipts from
the repayments of student loans, will be a further £5.7 billion per annum (DIUS 2008).
2. These are discussed elsewhere; see Callender and Heller (2009)
3. A quarter of the maximum maintenance loan is means-tested. The amount students can borrow for their living costs (but not for tuition fees)
varies depending on their family income, whether they receive a Government maintenance grant, where they live while studying, where in
England they study, and their year of study. Loans for living costs are paid in cash directly to the student while the value of the tuition loan is
transferred directly to the institution.
By2007/08,variabletuitionfeeshadgeneratedanadditional£878millionforthehigher
educationsector(OfficeforFairAccess2009).Thenewsystemofstudentfinancialsupport
ismoreprogressiveandhasresultedin‘asignificantincreaseintransfersfromgraduatesand
taxpayers,directedtowardsboththefundingofuniversitiesandstudentsupport’(Dearden
etal 2007:30).
But,asdescribed,thesereformshaveledtosubstantialincreasesinpublicexpenditurefor
severalreasons.Morestudentsthananticipated–69percent–nowreceiveaGovernment
maintenancegrant.Furthermore,studentloansforbothtuitionandmaintenancearevery
expensivebecausebetween80and85percentofundergraduatestakethemout,andthey
areheavilysubsidisedbytheGovernment.Theinterestonstudentloansforbothtuitionand
maintenanceisequaltoinflation,soineffectisazerorealrateofinterest.Thisislowerthan
therateatwhichtheGovernmentborrows.Inaddition,repaymentsarebasedona
graduate’sabilitytopay.Low-paidgraduateseitherpaynothingorhavelowrepayments
whilehigh-earninggraduatesrepaytheirloansatafasterrate.Anyoutstandingstudentloan
debtiswrittenoffafter25years.Thelongerastudenttakestopayoffherloan,thegreater
theGovernmentsubsidy.Consequently,maintenanceloanscosttheGovernmentaround£21
forevery£100astudentborrowswhiletuitionfeeloanscostit£33forevery£100borrowed
(Deardenetal 2007).4
Theinterestratesubsidies,however,areregressivebecausetheyparticularlybenefitstudents
fromhigher-incomefamilies(Barr2004).Moreover,becauseloansaresocostly,their
availabilityislimitedandtheydonotmeetallstudents’livingcosts.Andmoneyspenton
studentloansdivertsfundingfromuniversitiesandotherhighereducationactivities,
includingmeasurestoenhancequalityandtoimproveaccess.
If,asmanyexpect,thecurrentcapontuitionfeesisraisedfollowingtheforthcoming
Governmentreviewofstudentfunding,andstudentloanscoveranyincreaseinfull,asthey
must,thenthecostsoftuitionfeeloanstotheGovernmentwillescalate.Tuitionloan
subsidieswillbecomemoreregressiveasmorestudentsfromwealthierfamilieswillattend
universitieschargingthehighesttuitionfees,andsowillbenefitdisproportionately–25per
centofthericheststudentsgettopA-levelgradescomparedwith3percentofthepoorest
(Chowdry2008).
Principlesthatunderpinreform
Thereareseveralcoreprinciplesthatunderpinourproposedreforms.Someweredeveloped
originallyinthe1997DearingReport(NationalCommitteeofInquiryintoHigherEducation
[NCIHE]1997).
•Studentsupportshouldbe‘equitableandencouragebroadlybasedparticipation’
(NCIHE1997,para20.2)andhelpwidenparticipation.Economicprinciplesofequity
dictatethatpeopleofsimilarmeansshouldcontributethesameamounttothecostof
theireducation,whilepeoplewithgreaterabilitytopayshouldcontributemorethan
thosewithlessability(MusgraveandMusgrave1980).Studentsshouldbeprovided
withenoughGovernmentfinancialsupporttoensurethattheycanenrolinhigher
educationandcompleteadegree.Similarly,studentloanrepaymentsshouldbe
relatedtoagraduate’sabilitytopay,asiscurrentlythecase
•Thecostsofhighereducationshouldbesharedamongthosewhobenefitfromit,
namelysocietythroughthetaxpayer,studentsandgraduates,andtheirfamilies
(Johnstone2006).Thisnotionisnowbroadlyacceptedandunderpinscurrent
funding.Morecontroversialisthebalanceofcontributionsbetweenthese
beneficiaries.Ourproposals,likeearlierreforms,wouldincreasegraduates’
contributionsandshiftmoreofthecostsofgoingtouniversityontothem.
4. This subsidy includes defaults on repayment but does not include the cost of graduate repayment ‘holidays’ on loans announced in 2007.
•Highereducationshouldbefreeatthepointofuseforallstudents.Thepaymentof
tuitionfeesshouldbedeferreduntilstudentshavegraduated,asiscurrentlythecase.
Nostudentorparentshouldbeexpectedtopaytuitionfeesupfrontasthisisa
potentialfinancialbarriertoparticipationandisinequitableasonlywealthierfamilies
canaffordtopayupfrontorcanaccesscrediteasilytopayforfees.
•Studentfinancialsupportprovisions,wherepossible,shouldbeuniversalratherthan
means-testedbecauseuniversalbenefitsareeasiertounderstand,havehighertake-
uprates,andarenotsostigmatising.Whileourproposalslargelyadheretothis
principleintermsofaccesstoloans,theyalsoincorporatetherequirementthat‘those
withthemeanstodosotomakeafaircontributiontothecostsofhighereducation’
(NCIHE1997,para20.2).
•Thesystemmustbe‘easytounderstand,administrativelyefficientandcost-effective’
(NCIHE1997,para20.2).
Proposedreforms
Ourinitialproposalsaddressthefirstpolicyobjective–howtoreducepublicspendingon
highereducationwithoutunderminingthequalityofprovision,whileatthesametime
maintainingandwideningparticipationlevels.
WesuggestendingtheblanketGovernmentsubsidyonstudentloansforbothmaintenance
andtuitionfeesforallstudentsandreplacingthemwithmoretargetedsubsidies.Thiscould
beachievedindifferentways.Oneoptionwouldbechangingtheimplicitinterestrateon
loanrepaymentsforhigherearninggraduatesbutnotforlowerearninggraduates.Graduates
withlowerearningswouldstillbenefitfromloansthatcarriedazerorealrateofinterest.
Graduateswithhigherearningswouldhaveloanswithaninterestratepeggedtothe
Government’srealcostofborrowing.Another1percentcouldbeaddedtocoversomeof
thesubsidytolow-incomegraduatesandthecostsoflossesarisingfromtheprotective
featuresbuiltintoincome-contingentloans(forexample,debtforgivenessafter25years),as
wellasadministrativecosts.Sothetaxpayerwouldsubsidiselow-earninggraduatesasisthe
casenow,butnolongersubsidisethosewhobenefitfromhigherincomes.
TheadvantagesofsuchastrategytotheGovernmentareconsiderable.First,thissystem
wouldbemoreprogressiveandequitable.Thosewithgreaterabilitytopaywouldcontribute
moretothecostsoftheireducation.Second,itwouldreducethestudentsupportbill.Third,
thesavingscouldbeusedtoexpandthestudentloanschemetootherstudentgroupssuch
aspart-timestudentswhocurrentlyreceiveonlyminimalgovernment-fundedstudent
support,andsohelpwidenparticipation(Fazackerleyetal 2009).Finally,theincreasedcosts
ofborrowingmaydeterwealthierstudents,whoanticipatehigherearningsandwhodonot
needaloan,fromtakingoneout.
Suchasystemofuniversalaccesswouldberelativelyeasytounderstand,administratively
efficient,andcost-effectivewhilehighereducationwouldremainfreeatthepointofuse.
Analternative,cheaperbutfarlessprogressiveoption,wouldbetoendtheloansubsidyfor
allstudents,notjusthigherearninggraduates.Theinterestrateonstudentloanrepayments
wouldbelinkedtotheGovernment’scostofborrowingforallstudents.
Turningtothesecondpolicyobjective–howtopreserveinstitutions’revenueswithout
increasingpublicexpenditureonhighereducation–themostobvioussourceofadditional
fundingistuitionfees.Ariseinthecapontuitionfeesisalikelyoutcomefromthe
Commissiononstudentsupportarrangementsandvariablefees,whichisbeinglaunched
laterthisyear.Ifhighereducationistoremainfreeatthepointofuse,thepaymentofthese
highertuitionfeeswouldneedtobedeferredandrepaidongraduation.Tosafeguardequity,
affordabilityandwideningparticipation,anyfeesincreasewouldhavetobecoveredinfull
bytheexistingprovisionofincome-contingentstudentloans.
Oneobstacletoraisingthetuitionfeecap,apartfromtheveryrealpoliticalfall-outfrom
suchadevelopment,arethecoststotheGovernmentofprovidinglargerloanstocover
highertuition.Thesecostswouldbeloweriftheinterestratesonstudentloanswere
changedinlinewithourproposals.Significantly,too,thesmallestsubsidieswouldgoto
studentsfromthewealthiestfamilieswhowillmakeupthemajorityattendingthe
universitiesthatwillchargethehighestfees.Thesestudentswillgetthehighestpaidjobs
(Nayloretal 2002).
Whatarethelikelyconsequencesofhigherstudentloaninterestratesforthebestpaid
graduateswhotendtocomefromthewealthiestfamilies?First,boththeirstudentloan
repaymentburdenandtheirhighereducationcostswouldincrease,butthereislittle
evidencethatpotentiallyhigherrepaymentsorcostswoulddeteraffluentstudentsfrom
participatinginhighereducation,unliketheirpoorerpeers(CallenderandJackson2006,
Heller2008).Second,itmaytakethemlongertorepaytheirloans,butmuchofthiswould
beoffsetbytheirhigherthanaveragewagesongraduation.Third,studentswhentakingout
theirloanwouldnotknowwhatinterestratetheywouldbepayingoncetheygraduated.
Whendecidingwhethertotakeoutaloan,theywouldhavetomakearangeofassumptions
abouttheirfutureearnings.However,underthecurrentsystem,becausetheinterestrates
varyinlinewithinflation,theactualratespaidaresimilarlyunpredictable.
Formany,ourproposalswillbeconsideredunpalatableandpoliticallydifficulttoimplement.
However,fundamentalchangestothecurrentsystemofstudentfinancearerequiredifwe
wantanequitableandfairsystemthatcanmeettheneedsofhighereducationinthe
twenty-firstcentury–ifwewanttocutpublicspendingonhighereducation,whiledoing
everythingtopreserveinvestmentinhumancapital.
BarrN(2004)‘HigherEducationFunding’,OxfordReviewofEconomicPolicy 20:2,pp264-283
CallenderCandHellerD(2009)‘TheFutureofStudentFunding’inWithersK(ed)FirstClass?
ChallengesandopportunitiesfortheUK’suniversitysector,London:InstituteforPublicPolicy
Research,pp56-72
CallenderCandJacksonJ(2005)‘DoesFearofDebtDeterStudentsfromHigherEducation?’,
JournalofSocialPolicy 34.4,pp509-540
ChowdryH(2008)HigherEducationFunding,London:InstituteofFiscalStudies,availableat
www.ifs.org.uk/docs/pel08_chowdry.ppt
DeardenL,FitzsimonsE,GoodmanAandKaplanG(2007)HigherEducationFundingReformsin
England:TheDistributionalEffectsandtheShiftingBalanceofCosts London:InstituteforFiscal
Studies,WP18/07,availableatwww.ifs.org.uk/wps/wp1807.pdf
DepartmentforInnovation,UniversitiesandSkills(DIUS)(2008)Investinginourfuture:Departmental
report,2008 London:DIUS
FazackerleyA,CallenderC,ChantJandWilkinsonD(2009)EducatingRita?Amodeltoaddress
inadequatestatesupportforpart-timestudentsResearchNote.London:PolicyExchange
HellerDE(2008)‘Theimpactofstudentloansoncollegeaccess’,inBaumS,McPhersonMand
SteeleP(eds.),Theeffectivenessofstudentaidpolicies:Whattheresearchtellsus,NewYork:The
CollegeBoard,pp39-67
JohnstoneDB(2006)‘Cost-sharingandthecost-effectivenessofgrantsandloansubsidiestohigher
education’inTeixeiraPN,JohnstoneDB,RosaMJandVossensteynH(eds.),Cost-sharingand
accessibilityinhighereducation:Afairerdeal? Dordrecht,Netherlands:Springer,pp.51-78
MusgraveRAandMusgravePB(1980)Publicfinanceintheoryandpractice (2nded.)NewYork:
McGraw-Hill
NationalCommitteeintoHigherEducation(NCIHE)(1997)HigherEducationintheLearningSociety,
MainReport.London:HMSO
NaylorR,SmithJandMcKightA(2002) SheerClass?TheextentandsourcesofvariationintheUK
graduateearningspremium,CASEpaper54 London:CentrefortheAnalysisofSocialExclusion,
LondonSchoolofEconomics
OfficeforFairAccess(OFFA)(2009)Accessagreementmonitoring:Outcomesfor2007-08 Bristol:
OfficeforFairAccess,availableatwww.offa.org.uk/wp-content/uploads/2006/07/monitoring-
outcomes-07-08-offa-report.pdf
UCAS(2009)‘Applicantstatistics’,webpage,3September2009,availableat
www.ucas.ac.uk/about_us/media_enquiries/media_releases/2009/app_stats09/appsta030909
10.Policinginnewtimes
RickMuir
Thepoliceareunusualinhavingsurvivedthelast30yearsofpublicservicereformslargely
unscathed.Whereasschoolsandthehealthservicehavebeeninastateofalmostpermanent
revolutionsincethe1980s,thewaythepoliceserviceisorganised,managedandincentivised
hasnotsignificantlychangedoverthisperiod.Ofcourse,policingtodayisverydifferent
frominthepast:standardsarehigher,traininghasimproved,theroleismoredemanding
andtechnologicaladvanceshaverevolutionisedimportantaspectsofpolicework.Butthe
basicstructureofthepoliceserviceestablishedfollowingthe1962RoyalCommission
remainsintactandthepolicehavesuccessfullyfoughtoffattemptsbybothLabourand
Conservativegovernmentstochangeit.
Changeisnowunavoidable.Afterarealtermsincreaseinfundingof21percentbetween
1997and2007,thepoliceservicenowfacesthechallengeofcopingwithasignificantcutin
resources.Thiswillnotbeeasygiventhattheserviceislikelytofacerisingdemands,
particularlyiftherecessionpushesthecrimerateupwards.Thepolicewillhavetodomore
withlessandtheonlywaytodothatistoreformthewaytheywork.
Thischapterarguesthatthepoliceserviceshouldembracethecurrentcrisisasan
opportunityforchange.Ratherthansimplyslashingthenumberoffrontlineofficers,the
serviceshouldfindwaysofdoingthingsdifferently.IftheGovernmenthasthepatienceand
couragetoseethroughaseriousprogrammeofpolicereform,itcouldbothimprovethe
serviceatthefrontlineandsavemoney.
Policeperformance
Althoughspendingonthepolicehasrisendramaticallyinrecentyears,policeperformance
hasnotimprovedcommensuratewiththatincrease.Fromtheoverallcrimefigures,police
performancelooksverystrong.CrimeasmeasuredbytheBritishCrimeSurveyhasfallenby
45percentsince1995andfearofcrimehasfallensignificantlyoverthesameperiod
(Walkeretal 2009).However,mostofthatfallwasduetoBritain’sbuoyanteconomyover
thatperiod,ratherthantotheimpactofpolicing(Solomonetal 2007,Pearce2007).
Becausetheoverallcrimerateisaffectedbymanydifferentfactors,weneedtolookatother
indicatorstoassessthesuccessorotherwiseofpolicework.
Crimedetectionratesshowlittleimprovement:28percentofrecordedcrimeswere‘cleared
up’in2008/09–whichislittledifferentfromthe29percentdetectionratein1998/99
(Gash2008,Walkeretal 2009).Althoughchangesinreportingstandardsin2002meanthat
infactthe2008/09detectionrateislikelytobesignificantlybetterthanthatin1998/99,
muchoftheincreaseindetectionssince2002hasbeenmadeupofcautionsforminor
offencesandtheimpositionofnew‘penaltynoticesfordisorder’.Thenumberofdetected
offencesleadingtoacourtsummons,inotherwordsthoseonewouldexpecttocoverthe
mostserioustypesofoffences,hasactuallyfallenoverthesameperiod.1
Detectionratesalsovaryenormouslyfromforcetoforce,suggestingthatpoliceperformance
ispatchyacrossthecountry.Forexample,in2008/09thesanctiondetectionratefor
violenceagainstthepersonwas67percentinCumbria,butjust34percentinStaffordshire
andLeicestershire.Inthesameyear,thesanctiondetectionrateforrobberyrangedfroman
impressive66percentinCumbriatojust16percentinGreaterManchester(Walkeretal
2009).
1. Detected crimes are those that have been ‘cleared up’ by the police. Detections can be subdivided into two categories: sanction detections
(where the offender receives some formal sanction) and non-sanction detections (where no further action is taken). The detection rate is the
number of detections recorded in a given year as a percentage of the total number of crimes recorded in the same period.
Detectionsperofficerhaveactuallydecreasedintheyearssince2003.Whereasin2003/04
eachofficerwasdetecting10.2offencesayear,thishasnowfallento9.4offencesper
officer.2
Publicsatisfactionwiththepolicehasfallen.Theproportionofthepublicsayingthatthe
policedoa‘goodorexcellentjob’fellfrom64percentin1996to53percentpercentin
2008/09(Allenetal 2006,Walkeretal 2009).Therehas,however,beenaslightincreasein
satisfactioninthelastthreeyears,whichcorrespondswiththeintroductionofthe
Government’sneighbourhoodpolicingprogramme(Walkeretal 2009).
So,despiteheadlinefallsincrimelevels,policeperformancehasnotimprovedsignificantly
overthelastdecade,andonsomemeasuresithasgotworse.Thisisdespiterecordincreases
inpublicspendingonthepoliceservicewiththehighestevernumberofpoliceofficersnow
inplace(Solomonetal 2007).TheUKnowspends2.5percentofitsGDPonitscriminal
justicesystem–thehighestofanyothercountryintheOrganisationforEconomic
CooperationandDevelopment(OECD),includingtheUnitedStates–andtwothirdsofthat
spendingisonthepoliceservice(Solomonetal 2007).
Thesefiguressuggesttaxpayersarenotcurrentlygettingthebestpossiblevaluefortheir
investment.Overthenextfewyearsresourcesarelikelytobesqueezed,meaningthat
furtherimprovementcanonlycomefromradicalreformtothewaythepoliceserviceworks.
Thepoliceworkforce
Mostofthemoneydedicatedtothepoliceisspentonitspeopleanditisinthisareathat
reformcouldbringaboutsomeofthemostsignificantimprovements.
Thecompositionofthepoliceworkforceshouldbediversified,aligningindividualskillsto
differenttasksmuchmorecloselythanatpresent.
Thegeneralroleofconstableshouldbebrokendownandofficersshouldbeallowedtofocus
onareasthatmostmatchtheirskillsandthattheyfindmostrewarding.Alongsidegreater
specialisationofroles,moreciviliansshouldbeemployedtocarryoutadministrativeand
customerservicetaskswhichwarrantedconstablescurrentlyperformathighcost.Workforce
modernisationpilotshaveshownthatbetteruseofcivilianstaffcansavesignificantamounts
ofpolicetime,enablingofficerstofocusonthefrontline.Inthelongrun,thisshouldmean
thatweneedfewerofficersoverall,deliveringsavingsovertime,whilealsoprotectingthe
numberofofficersoutonthebeat.
Theserviceshouldattractmoregraduatesandotherswhohavelearnedspecialistskills
outsidetheservice.Todothisthesinglepointofentryshouldbeabandonedandpay
restructuredtoenablerecruitmentfromoutsidetheserviceathigherlevelsofpay.
Policeteamsarecurrentlyfartoosmall.TomGashestimatesthatverysignificantsavings
couldbemadeovertimeifthepoliceweretomovetoteamsofeightofficersper
manager,thuscuttingoutexcessivelayersofmiddlemanagement(Gash2008).
Finally,andmostcontroversially,policepayshouldbereformed.Thecurrentsystemis
basedonlengthofserviceandrewardslongevityinpostratherthanperformance.Ifpay
weremorecloselyalignedtoperformanceandthedifficultyofdifferentroles,thiswould
rewardandincentiviseofficerswhoareperformingwell.Takentogetherthesereformsto
thepoliceworkforcewouldenhanceproductivityandprovideabetterserviceatlower
cost.
2. Police officer numbers from Mulchandani and Sigurrdson (2009). Overall number of detections taken from Kershaw at al (2008), Mitchell and
Babb (2007), Nicholas et al (2005), Walker et al (2006) and Walker et al (2009).
Organisationalchange
Thestructureofthepoliceserviceisinefficient.Thereisfartoomuchcentralinterferenceby
theHomeOfficeintermsofsettingprioritiesforandmonitoringtheperformanceoflocal
policeforces.Themovetoasinglepublicconfidencetargetisastepintherightdirection
buttherearestillplansforconsiderableamountsofnationalinspection.Moneycouldbe
savedintheHomeOfficeandHerMajesty’sInspectorateofConstabularybyputtinglocal
authoritiesinchargeofsettingprioritiesfortheirlocalpoliceandmonitoringtheir
performance.PeopleshouldholdtheirlocalcouncilstoaccountfordeliveryandWhitehall
shouldgetoutoftheway.
Thereistoomuchoverlapandduplicationinpolicing.Eachofthe43policeforcesdoesits
ownprocurementofIT,equipmentanduniformwhenitwouldbemuchmorecosteffective
toprocuretheseitemscollaboratively.Significantsavingsshouldbefoundthroughthe
poolingofbackofficefunctionslikeIT,humanresourcesandfinance.Informationsystems
andprocessesshouldbeconvergedtopreventlossesofinformationandtheinefficientuse
ofseparatesystems.
Noneoftheseproblemsiseveradequatelyaddressedbecausethereisalackofleadership
andcoordinationinthepoliceservice.Whilelocalpoliceprioritiesandoperationaldecisions
shouldbeleftforlocalauthoritiesandchiefconstablestodecide,thereshouldbeasingle
NationalPoliceAgencyatthecentrewithsomelimitedpowerstoensurethatforcesare
gettingthebestvalueforpublicmoney.Thisagencycouldasalastresortinstructforcesto
collaborateorprocureequipmentjointlyiftheywerenotdoingsooftheirownaccord.It
wouldalsoensurethatcross-regionalcrimewasbeingadequatelytackledthrough
coordinatingnationalandregionalpolicingefforts.
ThisNationalPolicingAgencywouldbeformedbymergingtheexistingNationalPolicing
ImprovementAgency(NPIA)withtheoperationalcomponentsoftheAssociationofChief
PoliceOfficers(ACPO).Sucharationalisationofexistingnationalpoliceagenciesshould
deliveradministrativesavingsofitsowninthelongrun.
Conclusion
Thepoliceservicehasnotundergonethekindofreformsthathavebeenundertakenin
otherpartsofthepublicservices.Politically,itisverydifficulttoreformthepoliceservice
becausethepublictendstosympathisewithandtrustthepolicemuchmorethantheydo
electedpoliticians.Reformisalsoinstitutionallydifficulttocarryoutbecausethepolice
serviceissofragmentedandlocalaccountabilitytendstobeveryweak.Thewayforwardis
toempowerlocalgovernmenttosettheprioritiesfortheirlocalforce,whilealsorationalising
existingnationalpolicinginstitutionsintoasingleagencyatthecentrethatwouldhavethe
abilitytodeliverreformstotheworkforceandensurevalueformoney.Thesereformswill
encounterresistancewithintheservice,buttheyofferawayofsavingmoneybyreducing
costsovertimeratherthanbyslashingfrontlineservicesintheshortrun.
AllenJ,EdmondsS,PattersonAandSmithD(2006)Policingandthecriminaljusticesystem–public
confidenceandperceptions:FindingsfromtheBritishCrimeSurvey,OnlineReport07/06,London:
HomeOffice
GashT(2008)TheNewBill:ModernisingthepoliceworkforceLondon:ippr,availableat:
www.ippr.org.uk/publicationsandreports/publication.asp?id=586
KershawC,NicholasSandWalkerA(2008)CrimeinEnglandandWales2007/08 London:Home
Office
MitchellHandBabbP(2007)CrimesDetectedinEnglandandWales2006/07London:HomeOffice
MulchandaniRandSigurrdsonJ(2009)PoliceServiceStrength13/09 London:HomeOffice
NicholasS,PoveyD,WalkerAandKershawC(2005) CrimeinEnglandandWalesLondon:Home
Office
PearceN(2007)‘CrimeandPunishment.ANewHomeOfficeAgenda’inPearceNandMargoJ(eds.)
PoliticsforaNewGeneration:TheProgressiveMomentBasingstoke:PalgraveMacMillan
SolomonW,EadesC,GarsideRandRutherfordM(2007)TenYearsofCriminalJusticeUnderLabour:
Anindependentaudit London:TheCentreforCrimeandJusticeStudies
WalkerA,KershawCandNicholasS(2006)CrimeinEnglandandWales05/06 London:HomeOffice
WalkerA,FlatleyJ,KershawCandMoonD(2009)CrimeinEnglandandWales2008/09Volume1
FindingsfromtheBritishCrimeSurveyandpolicerecordedcrime London:HomeOffice
11.Defence– Arealitycheck
GeneralLordCharlesGuthrieandAndyHull
Inmostoftheyearsbetween1997and2007thedefencebudgetenjoyedanincreaseinreal
terms.ThisnonethelessfailedtoreflecttheUK’sincreaseddefencecommitmentsandthere
isnowablackholeofsome£9billionperannuminthe£36billionannualdefencebudget.
Spendingisnotundercontrol.Largedefenceprocurementprojectswhenmismanaged
almostalwaysoverrunintermsofbothcostandtime,meaningthatintheendwecanafford
lessoftheequipmentwedecidedweneededwhentheorderwasfirstplaced.Thecurrent
top20majorMinistryofDefence(MoD)procurementprogrammeshaveacumulativedelay
of483months.ArecentMoD-commissionedindependentreviewconfirmedthatthe
department’sprocurementsystemwasoverheatedbecausetoomanytypesofequipment
werebeingorderedfortoolargearangeoftasksattoohighaspecificationinexcessofany
likelybudgettopayforthem.
Wehavetostopspendingmoneywedonothaveandstartdealingwithrealities.Some
fundamentalchoiceshavetobemade.ThisyearItalyhasdownsizeditsdefencespendingby
about7percent.Spainhasdonesoby4percent.TheUnitedStatesisscrappinghigh-cost
programmesliketheF-22fighteraircraftandtheEuropeanTheatreDefenceMissileShield.
Inthepresenteconomiccircumstances,spendingcutsareunavoidable,anddefencecannot
beexempt.
Whicheverpartyisinpowerafterthegeneralelectionshouldasamatterofurgencyperform
awide-rangingstrategicreviewofsecurity,includingbutnotlimitedtodefence.This
strategicreviewmustassessthechangedglobalsecurityenvironmentinwhichwenow
operate.Itmustidentifypossibleandprobablethreatsandhazards,bothgloballyand
specificallywithregardtotheUK,andtheappropriateresponsesinthelightofthat
assessment,prioritisingamongtheminthecontextofaworldwiderecession.Trade-offswill
needtobemade,andcertainrisksentertained:100percentsecurityisafalseprospectus.
Thestrategymustnotbecost-driven,butnorcancostssimplybeignored.Precious
resourceswillhavetobeusedmoreeffectivelyandsavingswillhavetobemade.
Anystrategicreviewofsecurityatthisjunctureislikelytobuildupapictureofaglobal
securitylandscape,radicallyreshapedsincethelaststrategicdefencereviewin1998.
Weliveinaworldnowwhereconflictbetweenstates,whileitcannotberuledout,isless
commonthanconflictwithin states.Weakandfailedstatesaremoredangerousthanstrong
ones,andnuclearproliferationisagrowingdanger.Thepotencyofnon-stateactorslikeAl
Qaedaisgreatlyenhanced,as9/11tragicallydemonstrated.Securityisnowarguablyas
muchaboutmitigatingandadaptingtoclimatechangeasitisaboutdefeatingenemies,as
demonstratedbytheinclusionofclimatechangeinthecurrentUSDepartmentofDefense
QuadrennialDefenseReview.Resourcescarcity–energy,food,water–threatensto
destabiliseplacesandpeoplesaroundtheglobe.Pandemics,suchasswineflu,canspreadat
ahithertounimaginablespeed.
Cyber-securityisnowseriousbusiness.Piratesplunderonlawlessseas.Therehasbeena
markedshiftfromconventionaltoirregularwarfare,asymmetricconflictandcounter-
insurgency.Urbanisationresultsin‘waramongthepeople’.And,asourexpeditionsinIraq
andAfghanistanhavebothshown,fightingwarsmaytosomeextentbeeasy,butbuilding
thepeaceishard.
Insecurityterms,itistimetomovefromoneeratoanother.Theriskprofilein2010ismuch
alteredfromthatofadecadeago.Wemustrebalanceourcapabilitiesaccordingly.
Weshouldretainsomeflexibilityinourmilitarycapabilities,butcontinuedattemptsatUK
full-spectrumcapability,actinglikeamini-US,arenotaffordablenow,nevermind
sustainableinthelongerterm.Intheforeseeablefutureitishighlylikelythatwewillbe
operatingaspartofalliances.Thismeanswecanmakecutsinareaswhereweduplicateor
addlittletoouralliesandspecialiseinareaswhereweaddmore.Wemustexamineburden-
sharinginmoredetail,withoutignoringtherisksinherentinrelyingonotherstoprovide
aspectsofourdefence.
WeneedtotakethisseriouslyinEurope,whereduplicationandredundancyarerife.The
military-industrialcomplexesofEuropeneedtobeshakenuptoreininspirallingcostsand
reduceproductionandprocurementdelays.ThewaytostrengthenNATOistostrengthenits
Europeanpillarbydeepeningstructureddefencecooperationandintegrationacrossthe
continent.TheUKcannotgoitalone.Europeneedstobemadetoworkinsecurityterms,
howeverimpossibleapoliticaltaskthatmightsometimesseem.TheUS,rightly,willexpect
anddemandnothingless.
Whatdoesthismeanfordefencespending?
Inconcreteterms,thiswillhavetomean,aboveall,notdevelopingnewweaponstofightold
wars.Thetwonew65,000-tonneaircraftcarriers,theplanestoflyoffthem,andthe
destroyerstoprotectthemmustbefirmlyintheframeforcuts.Thesuper-carriersare
currentlycosting£5billion(already£1billionmorethanoriginallypredicted).TheF-35Joint
StrikeFighterswhichflyoffthemcostupto£10billion,dependingonhowmanywebuy
(70percentmorethanpredictedin2001).SixType-45destroyersaresettocost£6billion.
WequestiontheordertheUKhasplacedfor232TyphoonEurofighteraircraft,atacostof
£21billion,butcontractualobligationsandpenaltiesmeantheGovernmentcannotbackout
now.Andyet,attheheightofthe1991GulfWar,thelargestnumberofUKfightersona
singlesortiewastwelve.Massairformationsareathingofthepast,andourprimaryally,the
US,hasnoshortageofplanes.
Intermsofpersonnel,politicianshavebeguntoquerytheratiothatatpresentallowsfor
86,000civiliansintheMoDtodirectour175,000servicemenandwomen.Inparticular,there
aredoubtsastotheneedfor23,000staffworkinginDefenceEquipmentandSupport.
Seriousthoughtmustalsobegiventothenumberofheadquarterswemaintainoutsidethe
MoD.
Reachinganappropriateconfigurationfortoday’sdefencemaymeanarecognitionthatthe
armedforcesarenotnecessarilyofequalimportanceandsomemaysuffermorethanothers
intermsofcuts.Itwillthenbevitalthatpettyinter-servicerivalryisnotallowedtointerfere
withourenactmentofnationalsecuritystrategy.
Butthemoneysavedbysomeofthecutssuggestedaboveisunlikelytobeavailableto
reducethefiscaldeficit.First,theblackholeinthedefencebudgetneedstobefilled.And
thenthereareareasofthedefencebudgetwheresoundsecuritystrategywillmean
increasedexpenditure.
Commandandcontrolassetsandintelligence,surveillanceandreconnaissancekitwillbe
needed,includingsensors,radar,satelliteimagingtechnologyandunmannedaerialvehicles.
Ourroboticsmayneedtobeenhanced.Wewillneedtoinvestmoreinbothdefensiveand
offensivecybercapability.TheArmy’sranks,currently99,000,needtoswellby15,000:
bootsonthegroundmatterinmostofthelikelyscenarios.Thesesoldiersneedproperkitto
dotheirjob:notjusthelmetsandbodyarmour,althoughtheyareimportant,butmore
counter-improvisedexplosivedevice(IED)equipment,helicopters,andheavy-liftaircraft.
FutureoperationsmayputapremiumonSpecialForces,bothathomeandabroad.The
Navyneedsfastpatrolboatstoeffectinterdictionsatsea.Weneedtobolsterourcapacityto
handlecivilcontingencieswithintheUK.Andwearguestronglyforthecreationofa
civilian/militarystabilisationandreconstructionforce,forthecriticaltaskofrebuilding
countriesravagedbywar.
Questionmarksoverthenucleardeterrent
TheUK’snucleardeterrentmustbepartofanystrategicreviewofsecurity,andwewelcome
therecentcreationofanewTop-LevelGrouptoconsiderit.Wemustapproachthisvexed
questioninthecontextofaworldinwhichBarackObamahasjustwontheNobelPeace
Prizeinlargepartforconvincingworldleaderstostatetheircollectivelong-term
determinationtogettoaworldfreeofnuclearweapons.
ObamaisworkingtowardsbilateralreductionsinnucleararsenalswithRussia.GordonBrown
hasannouncedtheUK’spotentialwillingnesstoplaceallorpartofournucleararsenalatthe
disposalofmultilateralnucleardisarmamentnegotiations,ifthatbecomesuseful,tohelpthe
world‘gettozero’.Meanwhile,theGovernmenthascuttheUK’sstockpileofwarheadsfrom
200to160andisthoughttobeconsideringcuttingitfurtherto120.Inkeepingwiththe
recommendationofippr’srecentCommissiononNationalSecurityinthe21stCentury,ithas
beenstronglysuggestedthatthekeydecisionontheinitial£2billionofworkonTrident
renewalmaybepostponeduntilaftertheNonProliferationTreatyReviewConferencenext
year.ThePrimeMinisterhasalsostatedattheUNGeneralAssemblythattheGovernmentis
willingtoconsiderreducingtheUK’sfleetofVanguardclasssubmarines(whichcarrythe
Tridentmissiles)fromfourtothree(saving£3billion).Theseareallmovesweendorse.
Manyarguethatnuclearweaponsareforfightinganenemythatnolongerexists.Here,the
contentionsarethat:anucleardeterrentwillbeofverylittleuseintacklingmostoftoday’s
andtomorrow’smostlikelythreats;theonlynationactuallytohavedroppedatomicbombs,
immolatingtensofthousandsofinnocentcivilians,wasnotanaggressivedictatorship,buta
liberaldemocracy;theabilitytoobliterateisnosoundbasisfornationalprestige,oraseatat
theUNSecurityCouncil;thecostsareprohibitive;andpublicopinion,pollssuggest,remains
infavouroftheretentionofsomeformofnuclearweapon,butonedeliveredmorecheaply,
acceptinganyconcomitantdecreaseincapability.Wehavesomesympathywiththeseviews.
However,ifourdemocraticallyelectedrepresentativesdecide–andtheremustbea
Commonsvote–thattheUKwillkeepanucleardeterrentforreasonsofstrategic
uncertaintyandcontinuity,thenthequestionbecomesoneofhowbesttodeliverthat
deterrent.Thecurrentsystemhasthreecomponents:theTridentmissiles(operationallife
until2042),thewarheadsonthem,andtheVanguardclasssubmarineswhichcarrythem
(operationallifeextendedto2024).Together,theyprovideastrategic,operationally
independent,crediblenucleardeterrentthatiscontinuouslyatsea.TheUKhasalready
approveddesignandconceptworkforanewfleetofreplacementsubmarines,butthe
decisiontogoaheadatacostof£11–14billiondoesnotneedtobemade–andshouldnot
be–untilatleast2014.
Someoptionsaremoreattractivethenothers.Deliverysystemsbasedonsurfacevessels,
aircraftorlandare,wearetold,impractical.Furtherextendingtheoperationallifeofthe
Vanguardsubmarinesmightbepossible.Equipping–asistechnicallypossible–modified
newAstuteclasshunter-killersubmarines(wehavesofarorderedthree,outofapossible
seven,atacostof£4billion)withnuclearwarheadsforlaunchonTomahawkcruisemissiles
wouldlikelybearound£10billioncheaper,butproblematic.Thesesubmarinesarecapableof
circumnavigatingtheglobewithoutsurfacingorrefuellingbutcruisemissileswouldhave
reducedrangeandpower,and,unliketheTridentintercontinentalballisticmissiles(ICBMs),
wouldbesub-sonicandsoeasiertoshootdown,atleastgivencurrenttechnologies.Itmay
yetprovepossibletomodifytheexistingAstutedesigntocarryICBMs,whichcouldassuage
thisconcern.
Intheend,though,withalleyesonthepublicfinances,thereisnogettingaroundthefact
thatTrident–builtbyBAESystemsinBarrow-in-FurnessanddockedatHMNavalBase
ClydeatFaslane–ishugelyexpensive.Ataprocurementanddevelopmentcostof£20–30
billion,dependingonwhosefiguresyoubelieve,renewaloftheTridentsystemlike-for-like
comesatanastronomicalcost.Thecountry’sbestbrainsareneededtothinkuppractical
waystodeliverourdeterrentmorecheaply.
Allthepricescitedinthischapterareforprocurementanddevelopmentonly–notlifetime
costs–andareaccurateonlyasfarassecrecyanduncertaintyconcerningactualcosts
permits.Yetsomeofthesebig-ticketitems,notleastTrident,haveverysignificantlifetime
costs.ThethinktankReformhasrecentlyarguedthatarenewedTridentsystemwouldcost
£70billionoveralifetimeof25years,andGreenpeaceputthecostevenhigheratalmost
£100billion,factoringinexpenditureonassociatedactivityattheAtomicWeapons
EstablishmentatAldermaston.AfullerdebateonTridentthanispossibleherewouldalso
needtoconsiderpossibledecommissioningcosts,andtheindustrialramifications–interms
ofCumbrianandScottishjobs–ofterminatingtheprogramme.
Whatwearegoodat
WhateverthedecisionsmadeinWestminsterandWhitehallondefencespendingintheyears
tocome,coldwarrelicsandmuseumarmshavenoplaceinamodernBritishmilitary.
Defenceplannerscannotremainindenialabouttheharshrealitiesofthedownturn.Business
asusualisnotanoption.Wemustconcentrateonwhatweneedandwhatwearegoodat.If
wetrytobegoodateverything,wewillendupgoodfornothing.
BBC(2009a)‘BrownmovestocutUKnuclearsubs’,availableat:
http://news.bbc.co.uk/1/hi/8270092.stm
BBC(2009b)‘Defencebudgetfacingchanges’,availableat:
http://news.bbc.co.uk/1/hi/uk_politics/8257172.stm
BBC(2009c)‘DoUKtroopsgetthebestkit?’,availableat:
http://news.bbc.co.uk/1/hi/uk/8290803.stm
BBC(2009d)‘MoDequipmentplan“unaffordable”’,availableat:
BBC(2009e)‘ToriestocutMoDcostsby25%’,availableat:
http://news.bbc.co.uk/1/hi/uk_politics/8296575.stm
BBC(2009f)‘UKmustslashdefencespending’,availableat:
ChalmersM(2009)Preparingfortheleanyears London:RUSI
Channel4(2009)‘Governmenturgedtorethinkdefence’,availableat:
www.channel4.com/news/articles/uk/government+urged+to+rethink+defence/3241057
CodnerM,WillettL,IrelandGandGranholmN(2006)TheUK’sindependentstrategicnuclear
deterrentandthewhitepaper London:RUSI
DailyTelegraph,The(2009a)‘CuttingBritain’sdefencebudgettopayotherbillsisafalseeconomy’,
availableat:www.telegraph.co.uk/comment/columnists/benedict-brogan/5713990/Cutting-
Britains-defence-budget-to-pay-other-bills-is-a-false-economy.html
DailyTelegraph,The(2009b)‘GordonBrown“considerscuttingnuclearwarheadsbyaquarter”’,
availableat:www.telegraph.co.uk/news/newstopics/politics/defence/6303852/Gordon-Brown-
considers-cutting-nuclear-warheads-by-a-quarter.html#
DailyTelegraph,The(2009c)‘LordAshdownwarnsof£9bn-a-yeardefencebudgetgap’,availableat:
www.telegraph.co.uk/news/newstopics/politics/defence/5695320/Lord-Ashdown-warns-of-9bn-
a-year-defence-budget-gap.html
EdgeL(2009)Inthefiringline London:Greenpeace
FinancialTimesarticles(2009):‘AsilentdebateaboutUKsecurity’;‘Callforsinglesecuritybudget’;‘It
istimeforhardchoicesondefencepolicy’;‘BritainmustworkwithEuropeansondefence’;
‘DefencecutsreduceBritain’svalueasanally’;‘WhereBritainshouldcuttodefendtherealm’;
‘Newmodelarmy’
Guardian,The(2009)‘Revealed:the£130bncostofTridentreplacement’,availableat:
www.guardian.co.uk/politics/2009/sep/18/trident-replacement-hidden-cost-revealed
ipprSecurityCommission(2008)SharedDestinies:securityinaglobalisedworld, London:ippr
ipprSecurityCommission(2009)SharedResponsibilities:anationalsecuritystrategyfortheUK,
London:ippr
LeftFootForward(2009)‘ReplacingTridentwithAstutecouldsave£45billion’,availableat:
www.leftfootforward.org/2009/09/replacing-trident-with-astute-could-save-45-billion/
NewStatesman(2009)‘Defencespendingunsustainable,warnsthink-tank’,availableat:
www.newstatesman.com/2009/06/defence-trident-ippr-aircraft
Newsweek(2009)‘Europeslashesitsdefencebudgets’,availableat:
http://blog.newsweek.com/blogs/wealthofnations/archive/2009/07/22/europe-slashes-its-
defense-budgets.aspx
PerkovichGandActonJ(2009)Abolishingnuclearweapons,London:IISS
Times,The(2009)‘TheColdWarisover.Wemustmoveon,fast’,availableat:
www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article6605060.ece
12.Transport– Howdoweidentifythepriorities?
DavidBegg
Thechillwindsoftheeconomicdepressionareabouttohitthetransportsector.Uptonow
ithasbeenprivatecompaniesinthesectorthathavebornethebruntofthecutsin
expenditure.Forexample,publictransportoperatorshavebeendrivingdowntheircostbase
inadesperateattempttopreserveprofitmarginsinthefaceofslowerpassengergrowth.So
far,transportinthepublicsectorhasbeenrelativelyimmune.Butthatwillchangeafterthe
generalelection,whentheoverridingpolicyobjectivewillbetogettogripswiththe
country’sburgeoningfiscaldeficit.
Historically,transporthasalwaysbeenmoreexposedtopublicexpenditurecutsthanother
sectorsandthistimewillbenodifferent.Itismucheasiertoscraparoadscheme,reduce
spendingonroadmaintenanceordelayarailwayprojectthanitistocloseaschoolora
hospital.
WhenJohnPrescott,asSecretaryofStatefortheEnvironment,TransportandtheRegions,
launchedhis10-yearplanin1999,hepromisedtosecurehigherlevelsoftransport
spending.Thishasbeenachieved!Overthelast10yearspublicspendingontransporthas
tripledand,whilethisislessthanthefive-foldincreaseinhealthspendingoverthisperiod,it
comparesfavourablywithmostotherspendingdepartments.
ThishasresultedintheUKclosingthegaponotherEuropeancountriesintransport
spendingpercapita.Thehighlightsarearaftofnewroadandrailprojects(thebiggestbeing
theChannelTunnelRailLink),agoodstartonrebuildingLondon’sUndergroundandavery
generousfreetravelschemeforpensioners.
Outlookforthenextdecade
Theboomtimesareoverandwehadbetterprepareforadecadeofausterity.TheTreasury’s
ownforecastisthattotalinvestmentspendingwillfallbyahalffrom£44billionthisyearto
£22billionin2013.Whateverthepercentagecutinpublicexpenditure,historytellsusthat
transportwillbecutattwicetheaveragerate.TheDepartmentforTransport(DfT)spends
justover£12billionperannum:£5billiongoesonrail–£3.5billiontoNetworkRailand
£1.5billiontoTrainOperatingCompaniestoruntherailfranchises;£4.5billiontothe
HighwaysAgencyandtherestismadeupofdirectgrantstolocalauthoritiesandsupport
forthebusindustry.
Witharound40percentoftheDfT’sbudgetgoingonrail,youwouldthinkthatitwouldbe
exposedtocuts.However,toomuchisalreadycontractuallycommittedandtherearefew
easypickings.TheOfficeoftheRailRegulatorwillcontinuetoputtheefficiencysqueezeon
NetworkRailbutthiswillyieldamaximumof£1billionperannuminsavingsbythemiddle
ofthenextdecadeandmostofthefranchisecommitmentsDfThaswiththeTrainOperating
Companieshavesomewaytorun.
Thepoliticalpressurethathasbeenmountingonthelevelofrailfareswillmakeitvery
difficultforanyfuturegovernmenttoaskpassengerstopaymoretoreducetheburdenon
thetaxpayer.Thismeansthatrailexpenditureisrelativelyfixedcomparedwiththebudgets
fortheHighwaysAgencyandLocalGovernment.Anyexpenditureintheseareasthatisnot
committedandfirmlynaileddownisvulnerableinadecadethatwillwitnessapurgeon
publicexpenditureonanunprecedentedscale–eveneclipsingthecutsimposedbythe
ThatcherGovernmentintheearly1980s.
Theimplicationsforthetransportsectorareimmense.Canweaffordthenationalfreetravel
schemefortheelderly?Expenditureonthisisgrowingwildlyasthenumbereligiblespirals
upwards.Withtheunemploymentratelikelytoshootuptowards10percenttherewillbe
pressureonthetransportsectortocontributetowardsplanstogetpeoplebacktoworkand
reducingtransportcostswillbehighontheagenda.Reducingthenumberofjoblesspeople
shouldtakeprecedenceoverthenationalfreetravelscheme.Whilethisisrightfromapolicy
perspective,asalwaysitisthepoliticsofthiswhichislikelytobeashow-stopper.
Thebusindustryreceivesa£130millionperannumgranttohelpoffsetthefueldutyit
pays.Thiswillbehighupthelistforthechop.Busoperatorswillarguethatthiswillpushup
faresandwhyshouldtheypayfueldutywhenrailandaviationdonot.Buttheirpleaswill
fallondeafears.TheDfTiscomingunderincreasingpressuretoscrapthispaymentunder
stateaidrulesandtosubsidisefueldutypaymentsrunscontrarytotheGovernment’s
objectiveofcuttingcarbonemissions.
TheHighwaysAgenciesbudgetlooksveryexposed.Postponingorcancellingextraroad
capacitywillsavemoney;itwillhavelessimpactoncongestionlevelsduringaneconomic
downturnwithdecliningand/orslowgrowthintrafficvolumesandwillmeetwithminimum
publicresistance.
Whydoesourroadssystemhaveverydifferentgovernancearrangementsfromalltheother
utilities?Gas,water,electricity,telecommunicationshaveallbeenprivatisedwithan
independentregulatortoprotecttheconsumer.NetworkRailandWelshWaterarenot-for-
profitcompaniesatarms’lengthfromtheGovernment.Fortheanswerlooknofurtherthan
politicsandfinance.
Everynowandthenapolicypaperispublishedwhichmakespoliticianssitupandtake
noticeandgatherssupportivemomentumatWhitehall.TherecentpaperbytheRAC
Foundation–callingfortheHighwaysAgencytobeturnedintoacorporatebodyaspartof
awide-rangingreformofBritain’sroadsystem–isacaseinpoint(Smith2009).
WiththeprospectofanewGovernmentbeingformedwithinthenextyear,thisisafertile
periodfornewpolicyideas.Themainpoliticalpartieswillkeepahealthydistancefromthe
RACproposalforfearofbeingaccusedofwantingtoprivatisetheroads.Thisisonlyone
possibleoutcomefortheHighwaysAgencyproposedinthepaper,alongwithahostof
hybridgovernancepossibilitiesfromBBC-typepublicinterestcorporationstonot-for-profit
trusts.Butthemediawillimmediatelyjumptothemoresensationalheadlineofprivatised
roads,roadpricingandDickTurpinmoneycollectorstrouseringcashfromthepoorold
motorist.
Soweshouldnotexpectmuchpoliticalbackingfortheproposal,orforittofeatureinany
partymanifestoforthenextelection.Itwill,however,betopofthe‘todo’listforthenext
Government’sSecretaryofStateforTransportbecauseiftheGovernmentislookingforupto
20percentcutsinpublicexpenditure,fortransportthiswilltranslateintocutsofatleast30
percent.Thisisinevitableifthereistobeanelementofprotectionfromthecutsforthe
twobigelephantsintheroom:educationandhealth.Wefacetheprospectoftheroads
programmebeingdismantledandroadmaintenanceslashed.LittlewondertheRAC
Foundationisagitated.TheylookenviouslyatNetworkRailandtheleveloffundingthatis
committed,andraisethelegitimategrievancethatroadsarethepoorrelationincomparison.
Theprognosisforroadusersunderthestatusquoispoor.Lessinvestmentininfrastructure,
cutsinmaintenance–and,whentheeconomypicksup,trafficlevelswillreturntotheir
upwardtrend,creatingmorecongestion.Forapoorerservice,roaduserscanexpecttopay
moreasmotoringtaxesrisetoshoreupthepublicfinancesandtheimpactsofcarbon
tradingonthepriceoffuel.Moreover,theyhavenoregulatortoensurethatmoneyisbeing
spentefficientlyontheroadnetworkandnoconsumerwatchdogtolookaftertheir
interests.
Inthe1980stheThatchergovernmentfacedsimilarchallengesforthethenpublicly-owned
utilities:gas,electricityandBritishTelecom.Theywereinefficientlyrunandtheconsumer
wasgivenarawdeal.Privatisationprovedtobeoneofthemostsuccessfulpoliciesofthat
decadedespitefacingstiffoppositionatthetime(Ipleadguilty).Privatisingthemotorway
networkhassupportwithintheConservativeoppositionbuttheshadowcabinetviewitasa
politicalowngoalandtheycertainlydonotwanttoturnitintoanelectionissue.
Thereasonroadshavebeenleftbehindbytheprivatisationbandwagonisthattheydonot
generatearevenuestream.TheRACarguesthatvehicleexcisedutyandfueldutyqualify,
butthelastthingacash-strappedTreasuryisgoingtoagreetoissiphoningoffmajor
revenuestreamstofundroadinfrastructure.
Roadpricingwillcomebackontheagenda–anditwillbedrivenbyfinancialexpediency.
Opportunityforchange
Thedireeconomiccloudsmayproduceasilverliningasfarastransportpolicyisconcerned.
Financialexpediencycouldgiveaboosttotheroadpricingagenda.Therewereover30local
authoritiespreparedtoimplementcongestioncharginginthelate1990s.Thesubstantial
growthinlocalauthorityfundingfortransportoverthelastdecadehasdampenedthe
appetitetotapintonewrevenuesources.
Historically,theBritishtransportdiseasehasbeentocurtailexpenditureoncapacity(road,
railandairports)–usuallybecauseofTreasuryconstraints,butoftenforenvironmental/
politicalreasons–whilefailingtorestrictdemand.Theresultiswehavethemostcongested
transportsysteminEurope.
Whataperfectopportunitytobreakawayfromourpastmistakesbychargingforcongestion
andpollution,constrainingdemandfortravelwhentheupturncomesandatthesametime
raisingmuchneededrevenue.Thiswouldbemuchbetterfortheeconomyandthe
environmentthanputtingtheemphasisontaxingincome,wealthcreationandemployment.
Letushopeafuturegovernmentfocusesmoreontaxingeconomicbadsthaneconomic
goods.
SmithJ(2009)GovernanceandAdministrationofNationalandLocalRoadsinGreatBritain:Main
Report,ReportNumber09/101,London:RoyalAutomobileClubFoundationforMotoring
13.Localgovernment–toughdecisionsahead
TonyTravers
Localgovernmentwasnotparticularlyfavouredduringtherecentyearsofpublicsector
expansion.ComparedwiththeNHS,schoolsorinternationaldevelopment,councilshave
beenseenastoodistant,toodiffuseandtoodifficulttoofferministerstheopportunityto
spendpublicmoneyinsuchawayastoclaimdirectcreditfortheresults.Moreover,local
governmentisfundedbytheever-unpopularCouncilTax,whichmeansaggressivecapping
hasbeenusedtolimitcouncillors’freedom.
Thetablebelowmakesthispointclearly,showingtheincreaseincurrentexpenditurewithin
sectorsandservicesovertheperiod2004–05to2008–09.
Table13.1.Increaseincurrentexpenditure,2004–05to2008–09
2004–05(£bn) 2008–09(£bn) Change(%)
Education(schools) 33.2 41.5 +25.0
NHS 78.9 104.8 +32.8
Internationalservices 5.4 6.8 +25.9
Alllocalgovernment 58.6 70.6 +20.5
Allcentralgovernment 330.2 408.8 +23.8
Sources:DCLG2008,HMTreasury2009
Notes:‘Education’isallservicesfundedwithinlocalgovernment,thoughthisisoverwhelmingly
schools.Since2006–07,schoolsfundinghasbeenthroughthecentrally-determinedDedicated
SchoolsGrant.‘Alllocalgovernment’excludeseducation.‘Allcentralgovernment’includesNHSand
internationalservices.
Currentspendingbylocalgovernmentincreasedbyjustover20percentincashterms
between2004–05and2008–09,whichwasaheadoftherateofinflationinthisperiod.
However,schools’spendingroseby25percentandtheNHSbyalmost33percent.Thisis
hardlysurprisingassuccessivegovernments,informedbypublicopinion,havegiventheir
greatestprioritytohealthandeducationspendingwhileshowinglittledesiretomaintain
localauthorityexpenditure(IpsosMORI2009,Question7).
BecausetheGovernmenthascappedCouncilTaxinEngland,localauthoritieshavenotbeen
abletoraiseitbymorethan3to4percentannuallyinrecentyears.Althoughcouncilsare
theonlyinstitutionapartfromParliamentthathasaccesstotaxrevenue,theircapacityto
usethispowerfreelyisverylimited.Localgovernmentcan,ineffect,spendanamount
generatedbythetotalofitscentralsupport(grantsandnationalnon-domesticrate),income
fromchargesanditscappedCouncilTaxyield.Therelativelylowpercentagespending
increaseshownTable13.1isindicativeofcentralgovernment’sdesiretoholdlocalauthority
currentspendingdownrelativetoothersectors.
Politiciansinboththemajorpartieshavespokenofadesiretomaintainhealthand
internationaldevelopment(andsometimesschools)spendinginrealterms(seeforexample
Guardian2009).Evidencesuggeststhattheseservicesarelikelytoreceivegreatestpriority
fromwhichevergovernmentisinpowerafterthe2010generalelection.Localgovernment
nolongerhasdirectresponsibilityforschools’funding,andnoneatallfortheNHSor
internationaldevelopment.The‘ageofausterity’thatliesaheadis,therefore,likelytosee
pressureoncouncilspendingincreasedbymorethantheaverage.
Likelyareasforcuts
Manyauthoritiesnowprivatelyexpectreal-termsreductionsintheirspendingofbetween10
and15percentoverthenextfivetosevenyears.Someevenenvisagecutsofupto20per
cent.Whitehallsupportislikelytobefrozen,whileCouncilTax,ifitisallowedtoriseatall,
willdosobylessthan3percentperyear.Yetwithinlocalgovernmentbudgetsliethe
police,fireandemergencyservices,socialcareforchildrenandfortheelderly,environmental
servicesandlibraries.Demographicswillnothelp,particularlyasnumbersoftheveryoldwill
risesharplyinthecomingyears.Thepublicaregenerallyenthusiasticforspendingonlaw
andorder,socuttingthepolicemayprovedifficult.Whitehallwill,asitalwaysdoes,make
demandsforhigherspending.Anycouncilthathasattemptedtocloselibrarieswillattestto
thehorrorsinvolved.
Localgovernmentleaderswillfacetheawkwardquestionofwhattocutandwhethertostop
providingsomeservicesaltogether.Westminster-basedLabour,ConservativeandLiberal
Democratpoliticianshaveunitedbehindtheideaofpublicsectorpayfreezes,‘efficiency
savings’,a‘cull’ofquangosandassetsales.Indeed,attheLabourPartyConferencethis
year,Cabinetministersmadecommitmentstoincreasedspendingtobepaidforby‘local
governmentefficiencies’–asiftheywerenewmoney.Butitwouldbedelusionaltoimagine
suchstepswillcomeclosetodeliveringthescaleofreductionslikelytoberequired.
Itisagainstthisbackgroundthatsome(mostlyConservative)councilshavebeguntolookat
radicalwaysofreducingthecostofprovidingservices.Generally,suchinitiativeshave
involved‘outsourcing’muchofthecouncil’sadministration(Illman2009).Otherproposals
haveincludedjointprovisionofservices1 ortheso-called‘EasyCouncil’model,basedonthe
logicofcheapairlines(Moore2009).TheGovernmentpublisheditsOperationalEfficiency
Programmereportduringthespringof2009,whichmadeanumberofproposalsformoney-
saving,includingassetsales,improvedprocurementandtheso-called‘TotalPlace’initiative
(HMTreasury2009b).
Localgovernmentwillhavetoconsiderawiderangeofwaysofmakingitselfmoreefficient
and/orloweringitscosts.Butsucheffortswillnotbesufficienttoavoidtheneedfor
reductionsinspendingonfrontlineservices.Nationalpoliticianshavebeendesperateto
avoiddiscussing‘cuts’andhavehadtoresorttoavarietyofrhetoricaldevicesandevasions
tominimiseanyimplicationthatthepublicshouldbeconfrontedwiththerealityofwhatlies
ahead.Councilleadersandofficialsnowfacethechallengeofhowtoapproachalongperiod
ofreducedlocalexpenditureagainstthisbackgroundofdenial.
Options
Itisinevitablethatlocalgovernmentwillneedtoincreasetheuseofchargeswherever
possible.Forsomeauthorities,incomefromfeesandchargesalreadyexceedstheirCouncil
Taxyield.Authoritieswillfindlittlealternativebuttopushupchargesforparking,licensing,
planning,leisurefacilities,socialservices,finesand,indeed,anypotentialsourceofincome.
TheLocalGovernmentAssociationshouldpresstheGovernmentformaximumfreedomto
testthemarket.Thelesswell-offcanalwaysbeshieldedfromthefullimpactoffeesand
chargesbytheuseofdiscountsandexemptions.
Asecondoptionwillbetopursuetheoptionof‘outsourcing’back-officeactivities.Many
councilsalreadydothis,soitislessdramaticanoptionthanitwouldhavebeeninthepast.
LabourandLiberalDemocratauthoritieshavegenerallybeenaswillingasConservativesto
usecontractorsandconsultantstodeliverservices.Butinfuturethescaleofcontracting-out
islikelytoberadicallyincreased.Whatevertheideologicalobjectionssomecouncillorsmay
haveto‘privatisation’,theremaybelittlechoiceifthealternativeiscuttingthenumberof
socialworkersorstreet-sweepers.
Third,manycouncilswillconsidercuttingbackon‘non-statutory’activities.Thissounds
easierintheorythanitwouldbetodeliverinpractice.ThroughouttheThatcheryears,when
1. See, for example, joint agreement between Gosport and Eastleigh councils to provide joint audit services,
www.eastleigh.gov.uk/meetings/Published/C00000432/M00003896/AI00022000/$GBCandEBCPartnershipAgreement20092012v9.docA.ps.pdf 1
a‘cuts’narrativewaspopularwiththeGovernmentaswellastheirpoliticalopponents,it
provedalmostimpossibletostopdeliveringstateservices.Anumberwereprivatisedorhad
chargesimposed,butnonewasactuallycloseddownorstopped.Thuspublicservice
pensions,libraries,leisurefacilities,subsidisedbusservicesandgrantstovoluntary
organisationsallsurvivedthe1980s.Itishardtoimaginethatcouncilswillfindthewholesale
removalofprovisionanyeasiertodaythaninearlierdecades.
Fourth,followingLondonBoroughofBarnet’sforayintothe‘EasyCouncil’model,itis
almostinevitableanumberofcouncilswillfindwaysofchargingforservicesprovidedat
levelsaboveabasicstandard.Dependingonhowsuchanoptionispresented,itcanappear
divisiveorasensiblewayofraisingmorerevenue.Somepeoplewouldseethepossibilityof
councilschargingextraforservicelevelsabovethenormascreatingtwo-tierprovision.
Otherswouldviewthesameideaasbuildingon,say,themodeladoptedwithintherailways
orattheUKgovernment’sPassportAgencywherepeoplecanpayabovetheoddsfora
betterqualityorquickerservice.Manyauthoritiesalreadyofferoptionswithinsocialservices
orlibraryprovision,thoughgenerallynotasawayofcross-subsidisingtherestoftheir
services.
Afifthoptionwouldbeforauthoritiestojointogetherwithothercouncilsandpossiblyother
publicserviceproviderstoachieveefficienciesbypoolingbudgetsandservices.Thisisthe
logicoftheGovernment’sTotalPlaceinitiative.Inprinciple,thisisanideathatcould
producebigsavingsforallpublicservices.However,thereareobstacles.Localcouncilsoften
finditdifficulttoworktogetherformallytodelivermajorservices.Moreawkwardly,Whitehall
departmentshavelongbeenunwillingtoallowtheirlocalbodiestopoolbudgets.Thus,
whilejointprovisionandpartnershipsoffersignificantpotentialbenefits,therewouldhaveto
beradicalchangesinapproachforthistohappenonanykindofscale.
Sixth,theGovernmentmightbepersuadedtoallowcouncilstotakecontrolofsomeofthe
socialsecuritybenefits,particularlyhousingbenefit,paidtopeoplelivingwithintheirarea.A
numberofauthorities,includingEssexandLondonBoroughofNewham,havefromtimeto
timemadeproposalstomakemoreconstructiveuseofsomesocialsecurityresourcessoas
tomakelonger-termchangestotheirareas.Althoughradical,ideasofthiskindcould
potentiallydeliversignificantlonger-termsavings.
Finally,councilsmaydecideitwouldbeeasiertomakeacross-the-board,‘salami-slice’cuts
tomanyoralloftheirservices.Althoughsuchanapproachishardlybrave,itmighthavethe
meritofsimplicity,comprehensibilityandakindoffairness.Apublicsectorpayfreeze,
suggestedbyallthemajorpoliticalparties,isakintoasalami-slice.Flat-ratecutswouldbe
inclusiveandthepublicwouldunderstandwhatwasgoingon.Itwouldnot,ofcourse,allow
formuchsensitiveplanningorlogicalchange.
Councilsfacethefutureknowingreductionstotheirspendingareinevitable.The
Governmentismostunlikelytoshieldmany(orany)councilservicesfromcuts.Asaresult,it
islikelylocalauthoritieswillusesomeoralloftheapproachesoutlinedabove.By2015,local
governmentislikelytobespendingmanybillionsofpoundsayearlessthanatpresent.Staff
numberswillbe10to15percentlower.Manyserviceswillbedeliveredbyexternal
contractors.2010willbethestartofaradicalprocessofchangewithinlocalgovernment.
Planningandcommonsensecouldmakethisaprocesswithbeneficialoutcomes.Thepublic
willsurelyexpectsucharesult,evenifnationalpoliticiansaretoofearfultoexplainwhatis
goingon.
CommunitiesandLocalGovernment(2008)LocalGovernmentFinanceKeyFacts,November,London:
CLG
Guardian,The(2009)‘Governmentspending:LabourandConservativeplanscompared’,The
Guardian,12June
HMTreasury(2009a)PublicExpenditureStatisticalAnalyses2009,Cm7630,Norwich:TSO
HMTreasury(2009b)OperationalEfficiencyProgramme,Finalreport London:HMTreasury
IllmanJ(2008)‘Essexplans£5.4bnoutsourcecontract’,LocalGovernmentChronicle, 13November
IpsosMORI(2009)PublicSpendingIndex.ResearchconductedbyIpsosMORI,June
MooreM(2009)‘BarnetcounciladoptseasyJetandRyanairbusinessmodel’,TheDailyTelegraph,28
August
14.Publicsectorpay–timetosharetheprivatesector’spain?
BridgetRosewell
Somemightthinkthattheprivatesectordeservesitspainandthatthecomeuppanceof
bankersandotherfatcatsislongoverdue.Thepublicsector,itisargued,hasneverindulged
inthesameunseemlypracticesastheprivatesectorandthereforeremainsmoreresponsibly
rewarded.
However,thegulfbetweenpublicandprivatesectorpayismuchgreaterthaniscommonly
realised.Evenbeforetakingintoaccounttheenormouslymorefavourablepension
entitlementsofpublicsectorworkers,underGordonBrown–firstasChancellorofthe
ExchequerandthenasPrimeMinister–mostofthemhavecometoearnconsiderablymore
thantheirimmediatecomparatorsintheprivatesector.
Trendsinpay
Ifweexaminetheaverageearningsofpublicandprivatesectorworkers,ascompiledinthe
AnnualSurveyofHoursandEarnings,itshowsthatthedifferencebetweenthepublicand
privatesectorsisminor.Overthelast10yearstheaveragepayofadultsinthepublicsector
(infull-timeworkandwhosepaywasnotaffectedbyabsence)variedfrom4percenthigher
to4percentlowerthanthatofthoseintheprivatesector.Forthe10yearsasawhole,the
publicsectorwas0.6percentworseoff.Hardlyearthshatteringandyoumightsaythatover
time,rewardisfairlyevenlydistributed:butactuallyitisnot.
Tounderstandthis,wemustturntothestatisticsnotonaverageearningsbutonmedian
earnings.Sometimestheaverageandthemediancanbethesame.Thewomanofaverage
heightislikelyalsotobeofmedianheight,withhalfthefemalepopulationshorterthanshe
isandhalftaller.However,earningsarenotdistributedinthisway.Therearealotofwomen
whodonotearnverymuch–perhapstheyareon£10,000ayear–butthereareafewwho
earnmorethan£100,000.Addinginthesehighsalariespushesuptheaverage,butithas
verylittleimpactonthemedian–thesalaryofthehalfwayperson.Ifweareinterestedin
whatincomesmostpeopleget,weshouldbemuchmoreinterestedinthehalfwaymark
thanintheaverage.Ifweonlylookattheaverage,thenthefigureswillbeskewedbythe
smallproportionsofveryhighearners.
Althoughintermsofaveragesthepublicandprivatesectorareverysimilar,themedian
publicsectorworkerin2008waspaid14percentmorethanthemedianprivatesector
worker.Theminordifferencesbetweentheaveragesisthusonlytheresultofthefactthat
thetypicalpublicsectorworkerearnsmorethanhisorhercounterpartintheprivatesector
Figure14.1.
Medianweekly 600
earnings,£
500
(all)
400
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300
Private
200
100
0
02
04
84
92
94
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08
86
88
90
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Year
butthisisoffsetbythefactthatintheprivatesectoratthetopendthereareafewworkers
paidbigmoney.
Formostpeopleitismorelucrativetobepaidbythetaxpayer.Thismeansthatalthough
therearemanylowpaidpeopleinthepublicsector,therearejustasmanyintheprivate
sector.Moreover,thisdifferentialhasbeenincreasing.
Figure14.1aboveshowstheearningsofthemedianpersoninboththeprivateandpublic
sectors.Itisclearthatanegligibledifferenceinpayinthemid1980sslowlyescalated
throughoutthesubsequentperiodandespeciallysincetheturnoftheMillennium.Thishas
happenedforanumberofreasons.
Thelasttenyearshaveseenahugeexpansionofspendingandemploymentwhichhasgiven
thepublicsectorasensethatitsactivitiesareworthmoreandmustbepaidmore.Pay
reviewbodieshavebowedtothedemandsofstaffformorepaytoreflecttheincreasing
demandfortheirservices.Suchbodiesalsocreateaself-referentialcirclewhereeachreview
feedsofftheonebeforetojustifyfurtherincreases.Thisprocessisoftencriticisedwhenit
appliesto,say,membersofboardsofpubliccompanies.Ithasreceivedmuchlessattention
inthewiderpublicsector.
Themedianpublicsectoremployeewouldhavetosufferacutinwagesof15percenttobe
atthesamelevelasthemedianpersonintheprivatesectordistribution.
Wouldthisbefair?Notifthepaydifferentialisjustifiedforoneoftworeasons.Oneisifthe
termsandconditionsofemploymentaremoreattractiveintheprivatesectorandthis
compensatesthemforlowerearnings.Theotherisifthehigherearningsinthepublicsector
reflecthigherskills,moreoutputandbettervalueformoneyforthetaxpayerswhose
incomesareusedtopayforthem.
Inthecaseoftermsandconditions,itisnotthecasethattheyarebetterintheprivate
sector.Publicsectoremployeesstillhaveaccesstodefinedbenefitpensions,whichare
availabletofewerandfewerprivatesectorworkers.Inaddition,holidayandother
entitlementsarerarelylessgenerousinthepublicsector.Thisdoesnotenableustodefend
higherwages.Nordoesvalueformoney.
Trendsinproductivity
Recentestimatesofpublicsectorproductivityshowthatsince1997productivityhasactually
fallen(Phelps2009).Thecalculationssuggestthatpublicsectoroutputsgrewby2.9per
centperyearbetween1997and2007,thesamerateastotaloutputinthewholeeconomy.
However,inputsgrewbyanannualrateof3.3percent,implyingareductionof0.3percent
peryearinproductivity.Soevenifpublicsectorworkersaremorehighlyskilled,theseskills
arenotproducingextraoutput.Skillsarebeingrewardedforwhattheymightrepresent,not
whattheyactuallyproduce.
Twothirdsofpublicsectoractivityhasdirectmeasuresofoutput,suchasnumbersof
childreneducated,andabouthalf(inhealthandeducation)alsohasadjustmentsforquality.
Onlysocialsecurityadministrationshowedanincreaseinproductivitybetween1997and
2007andsincethissectorcontributesonly2percenttototalgovernmentoutputthisis
insufficienttocounteractthefallineducation,health,adultsocialcare,children’ssocialcare,
andpublicorderandsafety.1
Ofcourse,theseestimatesareincompleteandinadequate.Thereareexampleswhere,for
example,keepingcasesoutofcourtmightbeeffectiveinimprovingpublicsafetybutwould
reduceoutput.Ontheotherhand,thiscanalsobesaidofseveralaspectsofprivatesector
output,eventhoughmarketmeasuresaremorereadilyavailable.Currentestimatesof
productivityshowthat,onaverage,productivityintheeconomyasawholeincreasesby
1. The police and defence have no direct output measures along with an ‘other’ sector.
around1.5percentperyear.Toturnthereductionofproductivityinthepublicsectorinto
anincreaseofthisscalewouldrequireamassivemis-measurementofoutputs,whichseems
quiteimplausible.
Itishardtoavoidtheconclusionthatrelativeearningsinthepublicsectorhaverisen,while
termsandconditionshaveshownarelativeimprovementandproductivityhasfallen.This
impliesthatthetaxpayerishavingtoworkharderandhardertosupporttheactivitiesofthe
publicsector.
Tocompensateforthelossofproductivityoverthelast10yearsforwhichwehavedata,
earningsshouldfallbyafurther3percenttobringthemmoreinlinewiththeprivatesector.
Thisofcoursemakesnoallowanceforanydifferencesinlevelsin1997,forwhichIhaveno
evidence.Evenso,itisthechangesthatarebeingcompared.Therelativecostofthepublic
sectorhasrisen–by17percent–duebothtotheincreaseinwagesandthelossof
productivity.
Theseestimatesareacrossthewholeofthepublicservices.Itmaywellbethecasethat
theseaggregatefiguresconcealregionalandsectoraldistinctionswhichpaintadifferent
picture.Forexample,inLondondifferentialslooklesspositivethanintherestofthe
country.AreportfortheGreaterLondonAuthorityin2003arguedthathighjobvacancy
ratesreflectedtheeffectofnationalpayscaleswhichfailedtoshowtherealitiesofthe
Londonlabourmarketandcostsofliving(NERA2003).
Equally,theremaybepartsofpublicservicethatdodelivervalueformoneycomparedto
theaverage.However,theexistingstatisticsdonotidentifythattherearemany.Inthefinal
analysis,publicservicesfaceawillingness-to-paytestwhichoughttobeasstrenuousasin
marketswhereconsumerscanvotewiththeirfeet.Indeed,giventhestate’scompulsive
powers,thistestoughttobeevenmorestringent.Publicserviceworkershavenoinbuilt
righttobepaidbetterandonbettertermsthanthoseintheprivatesector.Incentivesfor
morepeopletofindopportunitiesintheprivatesectorcouldwellincreasegrowthandvalue-
addedinwealth-creatingsectors.Suchvalue-addedisthesourceofgreatertaxesand
revenuesoverallfortheeconomyandinturncangeneratebetterandmoreeffectivepublic
servicesofwhateverform.
Conclusion
Thelast10yearshaveseengreatexpansionofthepublicservices.Theseinvestmentshave
certainlycreatedadditionaloutputbuthavenotbeenvalueformoney.Thefateofthe
medianprivatesectorworker,paidlessandtaxedmorethanhisorherpublicsector
counterpart,createsquitethewrongsetofincentivesintheeconomyforgrowthand
innovation.Taxpayers’moneyhasbeenundulyusedtoincreasetheprivateconsumptionof
thoseemployedintheprovisionofpublicservicesratherthanprovidetheservices
themselves.
Theanswer,howeverunpalatable,mustbetoshiftthisincentivestructure.Thismusttake
severalforms.Thedifferencesintermsandconditionsmustbeaddressedandthepension
systemmust,ataminimum,bereformedfornewentrants.Thenthereoughttobeapay
freezeacrosstheboard,andpaycutsabovethemedianlevelof,say,10percent.With
fallingpricesandfallingmortgagecosts,thiswillcauselittlehardshipandisinanycasethe
experienceatpresentofmanyintheprivatesector.Suchaproposalwillstillleavethe
medianpublicsectorworkerbetteroffthanhisorherprivatesectorcounterpart.
NERA(2003)TheLondonLabourMarket,CaseforLondon,TechnicalReport4,London:GLA
Economics,availableatwww.london.gov.uk/mayor/economic_unit/case_
for_london/labour_market_report_main.pdf
PhelpsM(2009)‘Totalpublicserviceoutputandproductivity’,EconomicandLabourMarketReview,
Vol3,No8,August
15.Let’saskthepublic
DeborahMattinson
AmongtheWestminsterVillagers–politicians,journalistsandpolicywonks–thereisabroad
consensusthatpublicspendingmustbecontrolledandborrowingreduced.
Muchoftherecentdebatestartsfromtheassumptionthatthis,objectively,istheright
analysis,andthatitisananalysisthatvotersshare.Infact,littlepublishedpollingactually
askswhetherthepublicagreewiththecentralargument,insteadtendingtopreface
questionswithinformationthatconfirmsratherthanquestionstheconsensusview.For
example,Yougovasks:‘ItiswidelyacceptedthatanyGovernmentwillhavetotaketough
decisionsoverthenextfewyearstoreduceborrowing…whichoftheseoptionsdoyou
prefer?’
So,dothepublicactuallybuyintotheviewofthepolicyelitethatadifferentapproachto
spendingisrequired?Itseemsthereisnotstraightforwardacceptanceofthisview.While
thereiswidespreadpublicknowledgethatspendinghasincreased,thesheerscaleofthe
increaseshasnevercutthrough,andpeoplestruggletounderstandthesignificanceofthe
millionsandbillionsbandiedaroundbypoliticiansandcommentators.Thishasalwaysbeen
thecaseandfocusgroupdiscussionsovertheyearshaverevealedvoters’lackofknowledge
abouttherelativecostsofdifferentprojects.Forexample,inthelate1990siratevoters
demandinganendtospendingontheMillenniumDomebelievedthatthesavedfunds
alonecouldsolvealltheproblemsoftheNHS.
Therearefundamentalinconsistenciesattheheartofthepublic’sattitudes.Debtis
universallyagreedtobeabadthing–peopleapplylearningfromtheirowndomestic
financesandfocusgroupanecdotesaboundoffriendsandneighbourscaughtinaspiralof
debt.Supportis,therefore,strongforalong-termplanleadingtodebtreduction.Thereis
alsonowanassumptionthatcutsareonthecards.InmidSeptember,Populusfound84per
centdescribed‘significantcuts’as‘inevitable’,regardlessoftheoutcomeofthenextgeneral
election.
Yet,thereisalsosupportforastrategyof‘fiscalstimulation’.Despitethedifficultvocabulary
oftenusedbypoliticiansandcommentatorsandthe,initiallycounterintuitive,natureofthe
proposition,investmentand‘growingyourwayoutofarecession’winsvotercredibility.In
fact,thereisconsiderableanxietyaboutcuttingtoosoon.YougovinSeptemberfound70
percentagreedthat‘publicspendingwillbecutinduecourse,butifitisdonetoosoon,
Britain’seconomywillbedamagedandunemploymentwouldrisestillfurther’.
Itisvitaltosetthepublic’sviewsoftheoptionsthatpoliticianslaybeforetheminthis
context.Whilepeopleknowthereisaproblem,theylackanyrealsenseofitsscaleor
implications.Theyarebroadlyawareofthedebatesaboutborrowinganddebt,andcuts
versusinvestmentbutdonotholdasettledviewofonesolution.
Inotherwords,thecasefortheWestminsterVillageconsensusisyettobemade.The
presumptionofvoters’agreementisapotentiallydangerousunderpinningiftoughchoices
aretobemade.
Whatsolutiondoesthepublicfavour?
Ifaskedtocomeupwiththeirownsolutions,andwithouthavingaccesstotheinformation
thathasformedthepolicyelite’sviews,mostvoterswilloptunequivocallyforeliminating
waste.Therationaleforthisistheirassumptionthatgovernmentswastetax-payers’money.
Therehasnotyetbeenagovernmentthathasescapedthiscriticism.
InJune2009,Yougovfound77percentagreeingthat‘itisinprinciplepossibletocutpublic
spendingby£10inevery£100withoutreducingthequalityofpublicservicesorthelevelof
welfarebenefits’.MORIfoundthat63percentagreedthat‘therearemanypublicservices
thatareawasteofmoneyandcanbecut’,and77percentdisagreedthat‘publicservices
arealreadyrunefficiently,andtheonlywaytocutspendingistocutservicesprovidedto
thepublic’.
Yetqualitativeresearch,diggingbeneaththesefigures,showsthatthepublic’sviewofwhat
constituteswasteisnotclear.Itsuggeststhatpeople,oftenencouragedbypoliticians
themselves,latchonto‘waste’–anuncontroversialnegative–asawayofachieving
imperceptiblecuts.Furtherprobingrevealsthatthesamevotermaybeunwillingtolivewith
therealconsequencesofthecutsthattheypropose.
Whenposedasachoicebetweenalternativestrategies,thepublicofferanunhelpfuland
inconclusivethree-waysplit.Evenwhenthequestionisprefacedwiththeusualstern
restatementoftheWestminsterVillageconsensus–‘governmentborrowingisnowatrecord
levelsandwillneedtobereducedinfuture’–36percentfavour‘governmentspending
shouldbereducedevenifitmeansspendingonkeypublicservicesshouldbecut’,while38
percentagree‘spendingonpublicservicesshouldbemaintainedevenifitmeansincreasing
theincometaxIpay’.Thereremainswidespreaduncertaintyaroundtheissue,with27per
centsayingthey‘don’tknow’whichofthetwostatementscomesclosesttotheirviews
(MORI,September2009).
However,whenamorestraightforwardchoiceispresentedbetweentaxincreasesontheone
handandspendingcutsontheother,thepublicdialturnssharplyinthedirectionofcuts.In
September2009Yougovasked,‘Shouldcuttingthebudgetdeficitbemainlythroughraising
taxesorcuttingpublicspending?’Facedwithaquestionthatdoesnotmentionthepotential
impactofspendingcutsonpublicservices,only21percentofthepopulationsupportstax
increaseswhile60percentbackspendingcuts.Itisclearthattheprecisephrasingofa
questionaroundthiscomplicatedissuehasapowerfuleffectontheresultsofopinion
polling:itseemsthatmentioning‘spendingcuts’withouttalkingabout‘services’leadsto
greatersupportforreducingexpenditure.
Ifcutsaretobemade,whereshouldtheyfall?
Onethingisclearfromthesurveysandfocusgroups:theNHSisasacredcowinvoters’eyes
andcontemplatinghealthcutsisariskyexerciseforanypolitician.Just6percentpicked
healthfromalistofcandidatesforcutssuppliedbyYougov.Whenasked,unprompted,to
nametheareaspeoplefeelshouldbeprotectedfromcuts–evenifitmeanstaxrisesand/or
cutselsewherePopulushashealthtoppingthelistby15points.MORIfoundthat77per
centbelievethat‘someservicesshouldbeprotected’despitetheconsequenceofcuts
elsewhereorrisingtaxes,andthat82percentofthatgrouphadtheNHSinmind(schools
andcarefortheelderlycomesecondandthird).
Thisdoggedcommitmenttospendingistrueevenwhenthequestionisprefacedwiththe
Westminsterconsensusaboutthe‘deficitinpublicfinances’,asComreshasshown:support
ranat82and84percentfornotjustmaintainingspendinginhealthandeducationbut
increasingitinaSeptemberpoll.
ArecentMORIstudyfoundthatoverseasaidwasthepreferredareaforcutsat56percent,
withbenefitpaymentssecondat44percent,whiledefencewasthefavouriteinaYougov
poll(whichdidnotofferoverseasaidasanoption).Populusinvitedvoterstoselecttheir
owncandidatesforcutsandhadMPs’payandperksastheclearwinnerfollowedbylocal
authorities,defence,thencivilservants/governmentadministration.
Withinthesefindings,therearedemographicandpartydifferences.Oldervotersareless
likelytofavourcutstodefence,asareConservativevoters,whileLiberalDemocratvotersare
muchmorelikely.Thereis,incidentally,aspecificopportunitywithdefence:ICMfoundthat
54percentagreedthat,againstabackdropofTridentreachingtheendofitsoperational
life,‘Britainshouldnolongerhaveanucleardeterrent’.Yougovposedadifferentchoice,
statingthatreplacingTrident‘islikelytocostaround£20billion’andofferingalternative
waysofspendingthemoney.30percentoptedto‘replaceTridentasplanned’but65per
centpreferredalternativespendingplansincludingraisingnursespay(33percent)and
buildingaffordablenewhomes(23percent).Conservativevotersweremorelikelyto
supportthe‘Tridentasplanned’optionbutstill,onthewhole,preferredthemoneytobe
reallocated.
Theissueofwelfarebenefitsismorenuanced.ManyC1/C2swingvotershavelongfelt
aggrievedthatgovernmentisnotfairtothem.Theyseethemselvesasthe‘squeezed
middle’:notwealthyenoughtobeinsulatedfromtheeconomicdownturn,butnotpoor
enoughtobeonthereceivingendofhandouts.Theyidentifyagroupof‘deserving’poor:
theelderly,thosewhohavealongtrack-recordofworkandarerecentlyunemployed,and
theyoung.WhenYougovofferedarangeofchoicesforalternativewaystospendthe£1.1
billionusedtohelpyoungpeoplefindwork,67percentoptedtoleavethatbudgetasit
was.Thesevotersalsoidentify‘undeserving’poor:peoplewhotheybelievehavenotmadea
contribution,eitherbecausetheyarenewtoBritainorbecausetheyarelong-termreceivers
ofbenefitpayments.The‘undeserving’areharshlyjudgedandconsequentlytopofthelist
whenbenefitcutsarechosen.
Let’saskthepublic
Soareviewoftheavailabledataforguidanceonpublicopinionturnsupfewcertainties.We
canseethatthepublicdoesnotyetfullybuyintotheWestminsterVillageconsensus.This,
ofcourse,doesnotexcludethatpossibilityinthefuture.However,asthingsstand,thedetail
behindthedebatehasnotextendedbeyondWestminster.Meanwhilemanyvoters,without
thefactsthattheyneedtomakeaninformedview,seemtobasetheiropinionsonlong-
standingbeliefs:‘governmentswastemoney’,‘theNHSisagreatinstitution’,‘foreignersare
work-shy’andsoon.
Itistheproblemwithopinionpolls.JamesFishkin,thefounderofdeliberativepolling
methods,wherebypeoplearegivenbalancedevidencebeforebeingquestioned,observed
that‘ordinaryopinionpollscanonlytellyouwhatpeoplethink,givenhowlittletheyknow’.
Itisalsotheproblemwithanincreasinglydysfunctionalrelationshipbetweenvotersand
Westminster,whereeachhasdevelopedsuchalowregardfortheotherthatproperdebate
hasbecomealmostimpossible.
IfWestminsterisseriousaboutknowingwhatthepublicthinksthenitmuststopasking
questionsdesignedtoreinforcethestatusquoandstarttoreallylisten.Itmustclearly
communicatethefactsbehindtheissuesandseektoengagethevoterinagrown-up,frank
andopendialogue.Onlythiskindofno-holds-barredexchangeoffactsandviewscanlead
toagenuineconsensusaboutthewayforward.
Ofcourse,thealternativeistocarryonasweare,presumingthatweallagreeaboutwhat
needstobedonethendebatingthedetailselectively.ItisWestminstertalkingtoitself,and
itmeansthatpoliticiansandpolicymakerssettingouttheirfuturestallswithaneyeonthe
votersofHarlow,SloughandRedditchwillcontinuetomissthemark.
16.Opportunitiesfornewtaxes
PaulJohnson
ThisvolumefocusesmainlyonhowtheGovernment’sfiscaldeficitcanbecutthrough
reductionsinspending.Thereis,ofcourse,anotherroutetoclosingthefiscalgap–taxrises.
Whilespendingcutssurelyoughttobearthebruntofthework,taxriseswillhavetodo
theirshare–andthatsharemaybequitesubstantial.
Raisingreallyquitesubstantialsumscanbeachievedinnumerousways.Itdoesnotrequire
majoreconomicsurgery,thoughitcouldprovidetheopportunityforradicalandworthwhile
changestothetaxsystem.
Wecandistinguishthreebroadroutestoincreasingthetaxtake:
1)Incrementalchangestothecurrentsystem.Thesecouldbemoreorlessattractive,but
largeincreasesinthetaxtakearecertainlypossiblewithoutsignificantreformornewtaxes
2)Raisingmorerevenueaspartofalong-termvisionofreform,whichmayinclude,for
example,improvingtheefficiencyofthetaxsystem,increasingtheroleofenvironmental
taxesorincreasingprogressivity
3)Newtaxes,orsubstantialchangestocurrenttaxes,drivenbyimmediateneedsbut
withoutalong-termvision.
Theincrementalrouteispossible,thoughthereismuchtobegainedfromtakingthe
reformistroute,especiallyfollowingalongperiodofincreasingcomplexityandlackof
apparentdirectioninpolicymaking.Unfortunatelythecurrentgovernmentappearsseton
takingthelast,mostdamaging,route.
Incrementalchanges
ItisimportanttobeclearthatRoute1isperfectlyplausible.Relativelylargesumsofmoney
canberaised–inmoreorlessrationalanddesirableways–throughincrementalchangesto
thecurrentsystem.
Forexample,a1-pennyincreaseinthebasicrateofpersonalincometaxwouldraisearound
£5billionannuallyby2011–12.Andweshouldquitedefinitelynotruleoutanincreaseof
thiskind.The20pinthepoundbasicrateistheresultofadownwardtrajectoryoverthelast
30years.Therewouldlikelybenogreateconomiccosttoraisingitto21or22p–whichis,
inanycase,whereitappearedtohavesettledbeforethefunandgamesthataccompanied
theabolitionofthe10plowerrateoftax.Itisbizarrethatsuchapossibilityseems
effectivelybarredaspartofpoliticaldebate.
Increasesinnationalinsurancecontributions,ontheotherhand,seemmuchmorepopular
withpoliticians.Again,bigsumsarepotentiallyavailable.A1pincreaseinthemainemployee
ratewouldraiseover£4billionayearandasimilarincreaseintheemployerratewouldrake
inmorethan£5billion.WhilethebasicrateofIncomeTaxhasbeendecliningfor30years,
theselesspoliticallytroublesome–butlesseconomicallysensibleandlessprogressive–
NationalInsurancerateshavebeengraduallyratchetedup.
Asimilaramount,about£5billion,couldalsoberaisedby2011–12bynotindexingany
IncomeTaxallowancesandlimits.Thiswouldalmostcertainlybepoliticallyeasier–nobody
wouldappeartoloseoutincashterms,eveniftherewouldberealeffects.Butitseffectis
muchmoreregressivethanasimpleincreaseintaxrates.Infact,perhapsrathersurprisingly
givenitspretensiontoprogressiveness,thecurrentgovernmenthasalreadymadevery
substantialuseoffiscaldrag,throughafailuretoindexallowancesandlimitsinlinewith
earnings.ThenumberofpeoplepayingIncomeTaxrosefrom25.7millionin1996–97to
31.6millionin2007–08andthenumberpayingitatthehigherraterosefrom2.1millionto
3.7millionoverthesameperiod.
RaisingthemainrateofValueAddedTaxbyapennywouldalsoraiseabout£5billionayear.
Increasingdutiesonpetrolanddiesel,aroutewhichwasusedextensivelyinthe1990sto
helpclosethefiscaldeficitthatexistedatthatpoint,raisesaround£1billionforevery2p
increase.
Thepointoftheseillustrationsisnottosuggestthatanyorallofthesepolicieswouldbe
therightones.Indeedmostwouldbedistinctlyundesirable.Ratheritistoshowthepower
ofthecurrentsystemtoraisesubstantialadditionalrevenues.
Reform
Whileitisclearthatrealreformisnotnecessarytoraiserevenue,thereis,nevertheless,a
verystrongcaseforalong-termprogrammeofreformaimednotjustatincreasingtax
revenuebutalsoatcreatingamorerationalandmoreeffectivetaxsystem.Foratleastthe
lastdecade,thetaxsystemhassufferedbadlyfromthelackofanylong-termvisionor
direction.Thisisperhapsbestillustratedbythenumberofsimplepolicyabout-turnsin
recentyears.Themostegregiousexamplesincludetheintroductionthenabolitionofthe
10pstartingrateofIncomeTax,theintroductionthenabolitionoftaperreliefforCapital
GainstaxandtheintroductionthenabolitionofazerorateofCorporationTaxforsmall
companies.Ineachcasetheoriginalpolicywasillconceivedandtheabout-turnwas
welcomefromaneconomicpointofviewbuthighlydamagingpolitically.Itiscrucialthatthe
nextgovernmenttakesaviewofwhereitwantsthetaxsystemtohead.
Amongthedirectionsforreformthatareworthconsidering,threehavethepotentialbothto
raiserevenueandtoimprovethetaxsysteminonedimensionoranother.
First,ratherthanraisingthecurrentVATrate,VATcouldbeextendedtocoverthewide
rangeofgoodsandservicesthatarecurrentlyexempt,withasuitablecompensationscheme
forlow-incomehouseholdsalongside.Acompensationschemecanbereadilydesignedto
compensatesuchhouseholdsonaverage.Theproblemisalwaysthattherewillbelow-
earnerswholoseout–thosewhospendunusuallylargeamountsongoodsonwhichVATis
notcharged.Thismakesthetransitiondifficult.Buttofailtomakechangesforthisreason
resultsinthestatusquoneverchanging.
MovingtoawiderVATbasewouldsignificantlysimplifythecurrentsystemanditwouldget
ridofthedistortionsthatfavouronekindofconsumptionoveranother.Theargument
againstisthatthepoorspendalargerproportionoftheirincomeoncurrentlyVAT-free
goodssuchasfood.ButexemptingsuchspendingfromVATisnotaneffectivepolicyfor
redistribution.Incashtermstherichgainmorefromit.TheIncomeTaxandsocialsecurity
system–whicharedesignedtodotheheavyliftingintermsofredistribution–canbe
changedtocompensatethepoor,onaverage,fortheVATchange.
Second,thereissomescopeforincreasingenvironmentaltaxes–thoughnotperhapstothe
extentthatsomehaveclaimed.Threesubstantialchangesarepossible.
•TheimpositionofVATatthefullrateonenergyconsumption(essentiallypartofthe
firstsuggestionabove).Itisbizarrethatwecurrentlyeffectivelysubsidiseenergy
consumptionbychargingVATonitatjust5percent.
•Acarbontax,particularlyonthosepartsofenergyproduction(importantly,gasuse)
thatarenotpartofthecurrentEuropeanUnionEmissionsTradingScheme.
•Widespreadintroductionofroad-usercharging.Thisisnotjustdesirable–inthatit
wouldhavesubstantialeconomicbenefits–butisurgentandwillbecome
increasinglysobecauseascarsbecomemoreefficientthetaxonpetrolwillyieldless
moneyandwillrelatelessdirectlytothemainexternalitythatdrivingactuallycreates
–congestion.
Third,thoughtneedstobegiventothetaxationnotjustofincome,butalsoofhousing.
CouncilTaxiscurrentlyregressiveinrelationtohousevalue–thelessvaluablethehouse,
thehighertheCouncilTaxasaproportionofvalue.Itisalsocappedsuchthatownersof£10
millionhomespaynomorethanthosewhoown£1millionhomes.Bothequityand
efficiencydemandthatitrelatemorecloselytohousevalue(andthatthenextgovernment
finallymanagestoinstitutearevaluationofpropertiessothatrelativevaluein1991isno
longerthetaxbaseused).Inaddition,owner-occupiedhousingisstillsignificantlymore
lightlytaxedoverallthanrentedhousingandacasecanbemadeforgoingatleastsome
waytoeliminatingthisanomaly.
Thereareotherreforms,forexampletoInheritanceTaxandCapitalGainsTax,whichcould
raiserevenueandimprovetheequityandefficiencyofthesystem.Atpresentanygiftmade
morethansevenyearsbeforedeathisentirelyfreeofInheritanceTax.CapitalGainsTaxis
chargedataratelowerthantaxonincomefromsavings.CGTliabilityisalsoforgivenentirely
atdeath.VariousassetssuchasagriculturallandareexemptfromInheritanceTax.Allof
thesefeaturesarebothdistortingandinequitable.
Otherdesirablereforms–tothetaxationofsavingsandprofitsforexample–mightcost
money.Thecrucialthingforanewgovernmentistoconsiderthereformofthesystemasa
whole.
Itgoeswithoutsayingthatnoneoftheseroutestohighertaxtakewouldbeuniversally
popular,orpoliticallyeasy,butiftherewaseveranopportunitytomakesuchreforms,the
currentfiscalclimatesurelyprovidesit.
Deadends
Sowecouldmakeincrementalchangestothecurrentsystem.Muchbetter,wecould
instituterealreformsandimprovethesystem’sefficiency(and,throughadjustingthedirect
taxandsocialsecuritysystem,itsequity)whileraisingrevenue.Thusfar,though,thecurrent
governmentappearstohavetakentheworstofallroutes–imposingsubstantialnew
complexitywithoutanyclearlong-rungoal.
Themostheadlinegrabbingchangeannouncedbythisgovernmentaspartofitseffortto
raisetaxrevenuehasbeentheimpositionofahigherrateoftaxat50pinthepoundon
incomesover£150,000.Reasonablepeoplecandisagreeoverwhetherthisisagoodidea,
andindeedoverwhetheritwillactuallyraiseanymoney.Certainlyitwillnotraisemuch.But
alongsidethishavecomeonetrulybizarrechangeandonemassivecomplicationofthe
currentsystem.
Thebizarrechangeistheintroductionofa60percentmarginalrateofIncomeTaxon
incomesbetween£100,000andabout£112,000–suchthatthemarginalIncomeTax
schedulegoes:20percent,40percent,60percent,40percentand50percentasincomes
rise.Thiswassoldasatapering-awayofthepersonalallowanceforhigherearners,butwhat
itisissimplytheimpositionofa60percentmarginalrateoverarangeofincome.
Themassivecomplicationisthelimiting,to20percent,ofthevalueoftaxreliefonpension
contributionsforthoseearningover£150,000(actuallythereisatapertowards20percent
thatstartsforthoseat£150,000).Oneofthemanyextraordinaryfeaturesofthischangeis
thatitdirectlycontradictsthehugeamountofworkthatledtoasignificantsimplificationof
thetaxationofpensionsjustafewyearsago.(Itis,therefore,yetanotherexampleofthe
currentgovernment’slackofanoveralltaxstrategy.)Italsocreatesaseriesofinequities–
betweenthosewithdifferentsortsofpensionschemesandbetweenthosewithdifferent
shapedearningsprofiles–andincentivestoreduceapparentearnings.
Conclusion
Thereisanurgentneedforthenextgovernmenttoadoptacoherenttaxstrategy.Ifitdoes
so,itcanraiseadditionalrevenueswhilenotimposingsubstantialadditionalcostsonthe
economyandwhileimprovingtheoverallfunctioningofthesystem.Thisisoneofthebig
winsthatthecurrentfiscalcrisisactuallymakesavailable.Itwilltakesomepoliticalcourage
totakeadvantageofthisopportunity,buttheprizeisworththecost.
17.Isthisthefutureanddoesitwork?LessonsfromCanada
PeterKellner
Moderndemocraciesarenotgoodatcuttingpublicspending.Theirpoliticiansareafraidto
axecherishedservicesandopinionpollsfeedthosefears.Theresultisthatgovernments
tiptoeroundtheedges:huntingforefficiencysavings,curbing‘redtape’,closingquangos,
increasingtheroleoftheprivatesector,nibblingattheleastpopularbudgets–suchas
prisonsanddefence…anddoingallofthishaphazardly.Whencrisesdemandurgentshort-
termcuts,thefavouredmethodistopostponecapitalspendingprojects,forwhowillreally
mindifanewroadorhospitalisdelayedbyayearortwo,providedthatfrontlineservicesdo
notdisappearinthemeantime?
ThereareplentyofexamplesfromBritainandothercountriesofhowtocutpublicspending
insuchpiecemealways.TheThatcherandBlair/Brownyearswerefullofthem.Butwhat
aboutundertakingathorough,one-off,big-bang,reductioninwhatthestatespends?
ProbablytheclearestlessonscomefromCanada,whichsetoutin1994tocutcentral
governmentspending’sshareofgrossdomesticproductbyone-fifth,inordertobring
terriblefederalfinancesundercontrol.Insubsequentyearsthebudgetdeficitdisappeared
andtheeconomyflourished.ItisnowonderthatinrecentmonthssomeBritishjournalists
havewrittenarticleswhosemessageforbothLabourandConservativeleaderscanbesimply
summarisedas‘CopyCanada’.
Ifonlyitwerethateasy.CertainlythereisplentytolearnfromtheCanadianexperience.But
therearealsobigdifferencesintheunderlyingnatureofthetwocountriesandbetween
theireconomiccircumstancesthenandourstoday.
WhathappenedinCanada?
Betweenthemid-1970sandthemid-90ssuccessiveCanadiangovernmentslivedwell
beyondtheirmeans.Publicspendingclimbedfromunder40percentofGDPtomorethan
50percent,buttaxrevenuesdidnotkeeppace.Asaresult,federaldebtclimbedfromless
than20percentofGDPtomorethan70percent.Thegovernmentdeficitaveraged6per
centofGDP,andattimestouched9percent.Realinterestratessoared.Onethirdofall
governmentspendingwasusedtopayinterestonthemassivedebts.Italyapart,Canada
enteredthemid1990swiththeweakestpublicfinancesofanymajoreconomy.Thecore
reasonwasnotwilfulprofligacy,butthemountingcostofimplementingaraftofsocial
reformspassedinthelate60sandearly70s,suchasbetterstatepensions,healthcareand
unemploymentinsurance.
InOctober1993,theLiberalPartyreturnedtopowerwithasweepingvictory,oustingthe
Conservativeswhosecontingentinthe295-seatParliamentcollapsedfrom155tojusttwo.
Barringsomepoliticalcatastrophe,theLiberalscouldlookforwardtoadecadeormorein
power.Thisconfidencegavethemthepoliticalroomtotakeradicalactiontocurethe
government’sfinances,andsoredeemtheirelectionpledgetoreducethedeficitsharplyand
eventuallyeliminateit.
Assooftenhappens,theconsequencesofthatboldpledgehadnotbeenfullyworkedout
beforetheelection.But,foronce,anincominggovernmentdidnotfudgetheissue.It
repeateditspromisetohalvethegovernmentdeficitto3percentofGDPby1996–97.After
someconventionalnibblingatthespendingfiguresin1994(cuttingthedefenceand
unemploymentinsurancebudgets),JeanChretien,thePrimeMinister,andPaulMartin,the
newFinanceMinister,embarkedonahugeexercise,knownastheProgrammeReview,to
findbigsavings.Foroncethattiredterm‘root-and-branch’applies.
Oneofthemostimportantinitialdecisionswastosetrolling,two-yearspendingtargets,
combinedwithsix-monthlyprogresschecks.Previously,Canada(likemostcountries)had
publishedone-yearplansandlong-termaspirations.Thetroublewiththeseisthatoneyear
istoosoontoreapthebenefitsofbigchanges,whilethelong-termisalandbeyondthe
fiscalrainbow,whichsharp-elbowedministersprotectingtheirdepartmentalbudgetscan
safelyignore.
Twoyearsturnedouttobenottoosoon,nottoodistant,butjustright.Itgaveenoughtime
fornewpoliciestostartworking,butnotenoughtimeforministerstodumpresponsibility
forfailureontheirsuccessors.ThisiscertainlyonelessonthatcouldbeappliedtoBritain
especiallyif,ashappenedinCanada,ministerscometorealisethattheircareerprospects
dependonhowintelligentlytheyoffertocuttheirspending,nothowfiercelytheyprotect
theirbudgets.
Thesecond,andlarger,decisionwastorejectuniform,across-the-boardcuts.AsMrMartin
saidinaspeechin1995,suchastrategy‘isfraughtwithmoralhazardsinceapolicyof
uniformcutsdestroystheincentiveforindividualdepartmentstobecomeasleanand
efficientaspossible–thatis,inthenextroundofcuts,thekeenerwouldriskhittingbone
whiletheirlaxcounterpartsstillhavefattoslice’(citedinMartin1996).
Instead,MrChretienappointedaspecialcommitteeofministerstogothrougheach
department’sbudget,linebyline,anddecidewheremoneycouldbesavedbydoingthe
taskmorecheaplyormoreefficiently–orevenabandoningthetaskaltogether.Itturned
intoanintense,six-monthinquiryintothefunctions,aswellascost,ofagovernmentatthe
turnoftheMillennium.
Althoughthedecision-makingprocesswasultimatelyconductedbehindcloseddoors,itwas
undertakenwithinacontextofwidepublicdebate.Atthestartoftheprocess,MrMartin
announcedhisoverallobjectivesandpublishedarangeofbackgroundpapers.TheFinance
CommitteeoftheCanadianParliamentheldaseriesofpublicmeetings.Journalists,think
tanks,pressuregroupsandindividualswadedin.FewcoulddisputeMrMartin’sverdictat
thetimethat:‘theconsultationcontributedimportantlytocreatingreasonableexpectations
astothemagnitudeandthegeneralnatureofthebudgetactionsthatwereneeded.Thisis
surelyofgreatimportanceinbuildingpublicunderstandingandsupportforanyambitious
programmeoffiscalconsolidation’(Martin1996).
Thatsaid,thefinaldecisionswereinevitablycentralised.FortheperiodoftheProgramme
Review,Canada’sfuturewasultimatelydeterminedneitherbyopendebatenorbythe
aggregateeffectofdepartmentalplanning,butbythePrimeMinister,FinanceMinisterand
ahandfulofofficialsintheDepartmentofFinanceandPrivyCouncilOffice.Therewas
probablynoalternative.AnotherlessonfromCanadaisthatanyoneinBritainwhoyearnsfor
moredecentralisedgovernmentmayhavetodefertheirdreamiftheyareseriousabout
cuttingpublicspending.
Therewasonerespect,though,inwhichpowerwasdispersedfromthecentre.Beforethe
ProgrammeReview,Canada’sFederalGovernmentattachedstringstoitslargegrantstothe
country’sprovinces:somuchforeducation,somuchforsocialprotectionandsoon.
Afterwardsthiswasconvertedintoasingleblockgrant,forprovincestospendasthey
pleased.Astheprovinces,together,wereresponsibleforalmostonequarterofallspending
ontransfersandpublicservices,thisinvolvedalargemeasureoffinancialdevolution.
Provinceswerenotsparedpain:theirtotalincomefromthefederalgovernmentfellbymuch
thesameextent,proportionally,asspendingonfederalservices.Buttheyhadmuchthe
samefreedom,andresponsibility,asthecentralgovernmentinOttawa.Oneoftheeffects
wastoengagefarmorepeople,bothformallyandinformally,intheprocessofspending
cuts.Thisfurtherreinforceditspublicacceptability.
ThatparticularreformwouldterrifycivilservantsinWhitehall.Suchfinancialdevolution
wouldruncountertothetrendinrecentdecadesofcentralisingspendingdecisionsand
leavingcity,countyanddistrictcouncilsasdeliveryagenciesratherthantruearbitersoflocal
spendingpriorities.ButthenourcouncilsbearlittleresemblancetoCanada’sprovincial
governments,whosepowersaremoreakintothoseofScotland’sgovernment.InEngland,
thedifferenceswithCanadaaremoreapparentthanthesimilarities.
ImpactoftheProgrammeReview
Whenthedusthadsettledthefollowingimpactscouldbeobserved:
1.Theoveralltargetswerereached.Withinthreeyears,overallpublicspendingfellfrom
around50percentofGDPtoaround40percent.Thepublicfinancesimprovedrapidly.
Withinfiveyearsfederalnetdebthadfallenfrommorethan70percentofGDPtounder50
percent;withintenyearsthefigurehadhalvedto34percent.
2.Realpublicspendingfellby10percentinthreeyears.Withtheeconomygrowing,again
by10percent,overthesameperiod,itwaspossibletoreachthetargetofspendingasa
proportionofGDP.
3.Thecutsweretargeted.Inpercentageterms,thebiggestreductionswereinsubsidies(to
industry,transportandhousing),overseasaid,theenvironment,welfaresupportand
education.Healthwaslargelyprotected,aswaslawandorder.Justonedepartmentwas
allowedtospendmore(IndianandNorthernAffairs).
4.Manyofthesavingswereachievedthroughprivatisationandthetransferofgovernment
functionstofreestandingagencies.Minor,butsymbolicallyimportant,savingswereachieved
throughslimmingcentralgovernmentbureaucracyandreducingthenumberofcivilservants.
5.Politically,theprocessworked:theLiberalswonthenextthreegeneralelections.
LessonsfortheUK
Fifteenyearson,Canadahaschangedlessthanmighthavebeenimaginedbackin1994.
Theboundarybetweengovernmentandprivateresponsibilityhasnotshiftedgreatly.The
health,educationandwelfaresystemshavesurvivedlargelyintact.Indeed,healthspending
isnowhigherthanever,bothincashtermsandasaproportionofGDP.Yetsomechanges
arereal.Ontheplusside,Canadadidachievesubstantialefficiencygainsandcutspending
inarelativelyopenandpubliclyacceptablemanner.Ontheminusside,thepainhasbeen
visible,notablyineducation(withlargerclasssizes,especiallyinuniversities)andwelfare:
theOrganisationforEconomicCooperationandDevelopment(OECD)findsthatthegap
betweenrichandpoorhaswidenedsignificantly,andbymorethaninmostadvanced
economies,sincethemid-90s.
SowhatlessonsaretherefortheUK?Procedurally,quitealot.Anyequivalentexercisehere
woulddowelltocopyCanada’smethodsforpersuadingcabinetministerstobuyintothe
process,settingtwo-yeartargets,andinvolvingthepublicinthedebate.However,four
qualificationsshouldbenoted.
First,Canada’sfederalstructureisdifferentfromBritain’s;wehavefeweropportunitiesto
spreadtheprocessamongdecision-makerslocallyandregionally–unless,thatis,weintend
toendWhitehall’sabilitytodetermineeducationpolicyandsetwelfarebenefitsacrossthe
country.
Second,aspartofitsprocess,Canadacaughtupwiththingsthathadalreadystartedto
happeninBritain:privatisationandhandingresponsibilitiestoagencies.Intheserespects,we
havelessfattoshavefromoursystemtodaythantheyhadin1994.
Third,neitherLabournortheConservativescouldcopyCanada’sstrategywithoutviolating
commitmentsbothpartiesshare:reducingpoverty,maintainingthequalityoffrontline
servicessuchaseducation,fundingdefenceadequatelyandincreasingoverseasaid.
Fourth,andlargest,partoftherationaleforCanada’sProgrammeReviewwasthatitspublic-
sectordebtimposednotjustafinancialcostbutaneconomicone.Excessivepublicspending
crowdedoutprivateenterprise.Thishappenedviainterestrates.Realinterestratesinthe
early90swerealarminglyhigh.Formanyprivatebusinesses,thecostsofborrowingwere
prohibitive.AstheProgrammeReviewwasimplemented,rateshalved.Theprivatesector
couldborrowmorecheaply.Itwasabletotakeuptheslackindemandcausedbypublic
spendingreductions.Growthcontinued.Theimpactonthejobsmarketwasslowerbut
Canadaendedupwiththelowestunemploymentlevelsfor30years.
BritainisnotinthepositionCanadawasinthemid-90s.Publicborrowingiscertainlyvery
highbutourinterestratesareverylow,asisinflation.Infinancialandemploymentterms,
thereisnoevidencethatpublicsectorspendingiscrowdingoutprivatespending.This
presentsanyBritishgovernmentdedicatedtoreducinggovernmentdebtwithadilemma.If
itdoesnotact,thedebtwillgrowevenlarger;butifitactstoosoonandtoosharply,its
actionswillholdbackourfragilerecoverybyreducingtheoveralllevelofdemandinthe
economywithoutstimulatingprivatesectorgrowth.Canadaprovidesanessentialguideto
howtocutpublicspending;buttheverydifferenteconomiccircumstancesinwhichitacted
meanthatweshouldbecarefulaboutwhen,andhowfast,weplantoreducegovernment
debtinthefirstplace.
MartinP(1996)‘TheCanadianexperienceinreducingbudgetdeficitsanddebt’,FederalReserve
BankofKansasCity–EconomicReview,FirstQuarter
18.Thecaseforaslimmeddownstate
PhillipBlond
Thetroublewithmuchofthecurrentdebateaboutthepublicfinances,theindebtedstate
andprivatesectorrevivalisthatitremainscapturedbyanearliereconomicmodel.Thoseon
theleftarguefortheproductive‘demandmaintaining’roleofpublicspendingwhilethose
ontherightpointouttheessentiallyunproductivenatureofpublicexpenditure.Fortheleft,
highlevelsofpublicsectordebtandexpenditureare,inthepresentsituation,justifiableas
therealdangerliesinthecompletecollapseofthelabourmarketandahugerisein
unemploymentthatcouldforceusfromaV-shapedrecoveryintoanL-shapedrecession.The
rightalsofearsacollapseintheprivatesectorbuttheyworryaboutthestatecrowdingout
privatesectorrecoverywithhigherpublicdebtleadingtoincreasedinterestrepaymentsand
highertaxesontheprivatesector.
Inonesense,bothrationalesarecorrect.Therightiscorrectthatthepublicsectorcanbreak
theprivatesector.Anincreasingpublicdebtisunsustainableasitneedshighertaxesto
financeitandthosetaxesleviedonprivatebusinesseschokeoffprivatesectorrecovery
whichagaindiminishestheextentoftheTreasury’staxreceipts.Sothedeficitincreasesstill
further,requiringfurthertaxincreasesandstartingthecyclealloveragain.Insuchamanner,
anunreformedstategraduallystranglestheprivatesectorthatalonecanprovidethetax
receiptsandrevenuegrowthrequiredforeconomicrecovery.Moreover,increasingthetax
takeitselfdepressesthegrowthrateoftheeconomyasawholewiththestandardGDPloss
pertaxdollarraisedvariouslycalculatedatbetween30and50percent.1
Similarly,theleftcanargue,anditdoes,thattheissueisoneofmaintainingdemandwhile
theeconomyisfrighteninglyfragile.Knockoutpublicexpendituretooearlyintheeconomic
cycle,theycontend,andallthedemandintheeconomycollapses.Youthenhaveahuge
jumpinunemployment,whichdestroysbothdomesticconsumptionandinvestorconfidence
andplungestheeconomyintoanevendeeperslump.
Privatesectorgrowth
Ascanbeseenfromtheabove,thekeyfactorrequiredforeconomicrecoveryisprivate
sectorgrowth.Bothleftandrightarecogentinarguingforitbuttheyhaveonthefaceofit
diametricallyopposedviewsonhowtoachieveit.
Whattherightoftenmissisthatonekeytoprovidingprivatesectorgrowthisthepublic
fundingofinfrastructure.Ifthestatecanprovidethestructuralmeanstoaidcompetitiveness
–transport,broadbandcapacity,educationandtheconsequentdevelopmentofhigh-end
skills–thenpublicexpenditurecan,andindeeddoes,aidprivatesectorgrowth.But
objectively–thisiswhereLabourhassoevidentlyfailed–Britishinfrastructureisina
terriblestate.Eventhoughwearethesixthrichestcountryintheworld,wearerated34th,
behindNamibiaandSpain,intermsofourinfrastructure(Bosanquetetal 2009).
Insufficientinvestmentincommunications,utilitiesandtransportisakeyreasonforlow
Britishproductivity–indeed,BritainspendslessonthisareaasaproportionofGDPthan
anyothercountryintheOrganisationforEconomicCooperationandDevelopment(ibid).
OurrailnetworksaredecadesbehindthoseontheContinentintermsofcostpermilefor
theuserandeasyinter-cityaccess(travellinghorizontallyacrossthenationratherthan
verticallyviaLondonisaformofsufferingonewouldnotwillinglywishonanother).Our
transportnetworksarelightyearsbehindwhathasbeenachievedinpartsofAsiaand
mainlandEurope.Oureducationisproducingthefictionofevergreaterinternalsuccess,
1. See, for example, Harrison (2006: 165) or the following quoted from Smith (2006): ‘the US Congressional Budget Office (CBO) has reported that
the “typical estimates of the economic cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised”’.
whileexternallyintherealexport-creatingskillsoflanguages,technicalabilityandindustrial
innovationwearefallingeverfurtherbehind.
Onemightarguethatwehaveimprovedmuchoftheincomeofthosedependentonthe
statefortheirwages(theGPcontractspringstomind,asdotheNHSconsultantswho
boostedtheirpaybymorethan25percentforworkingfewerhours)butwehavenot
generatedenoughnationalassetstomakethegrowthinpublicexpenditureadriverof
privatesectorgrowthandsuccess.
Inshort,wehavespenttoomuch,tooineffectivelyonthewrongthings.Moreover,weseem
tohavegotlessformore.Publicsectorproductivityhasdeclinedby3.4percentintheten
yearssince1997whereastheprivatesectoroverthesameperiodhasseenariseof27.9per
cent.Thisproductivitygaphasproducedanetlosstothepublicpurse,ifwehadtrackedthe
privatesectorgain,ofsome£58billion(CentreforEconomicsandBusinessResearchLtd
2009).Anydefenceoftheproductiveroleofpublicexpenditurehastoaddresstheseissues
andexplainwhywehavefailedtomarshalthebenefitsofpublicexpenditureforoverall
economiccompetitiveness.
Inheadlineterms,publicspendingrosefromof36.3percentofGDPin1999/2000,to47.5
percentin2009/10,althoughthejumpinthisratioinrecentyearsisnotsomuchduetoa
massiveincreaseinpublicexpenditureoverthelastthreeasitistoacollapseinthelevelof
GDP.Nonetheless,theongoingstructuralbudgetdeficitisreal–itcomesfromrelyingon
therevenuesgeneratedfromabubbleintheassetpricesandmakingthatanormwhich
formsthegoverningbaselineforallfuturestateexpenditure.Farmorecogentwouldhave
beentoassume,asGilesWilkeshaspointedout,a2.5percentlong-termgrowthfigurefor
theeconomyratherthanthe3percenttheTreasuryappearstohaveused(Wilkes2009).
Giventhatthemajorityoftheongoingdeficit(some25percent)iscausedbyacollapsein
revenuesthatbeganwhenthehousingmarketstalledinsummer2007,thecriticismofthe
LabourPartyislessthattherehasbeenanunplannedsurgeinexpenditurethanthatthey
believedtheirownpropaganda.Theysuggestedthataneweconomicparadigmwith
permanentlylowinterestrateshadbeenachievedandthatthetimeofboomandbustwas
over,sogrowthfiguresandrevenuestreamsfromthegoodyearscouldbesafely
incorporatedintoexpenditureanddebtratiosforthenext.
Butdeficitsarestillrealandafalseassumptiononongoinggrowthhasleftpublic
expenditureworryinglyexposed.Publicspendingisnowapproaching50percentofGDP
andtheannualbudgetdeficitfor2009–10islikelytoexceedthe£175billionforecastinthe
April2009budget.Theongoingdebtflowwillhugelyincreasethestockofpublicdebtand
overallpublicdebtcould,iftrendscontinueandnothingchanges,hitnearly100percentof
GDPby2015.
Ifthebenigninterestrateenvironmentchangesasothercountriesbegintomoveoutof
recession,Britishdebtmightlookincreasinglyunattractiveandwouldrequireahigheryield
tosell.Thus,ourdebtpositionwouldbecomeincreasinglyexpensivetomaintainandworsen
thedeficitstillfurther.
Wearenot,however,inthe1980s.EvenifcoreinflationintheUKismuchhigherthanin
competitorcountries,fewseriouslythinkthatwearefacingaglobalinflationaryproblem.
Thustheoldrightwingagendaofpricecontrolisnotapplicableincurrentcircumstances
(orifitis,therealriskisdeflation,notinflation).Assuch,evenontheseterms
stimulatingdemandshouldbeinamonetaristlexiconastherightthingtodo.Thereal
fiscaldecisionliesinplayingoffunemploymentagainstdeficitreduction.Cuttooearly
andtoosoonandyouriskkickingoutthelastpropholdinguptheBritisheconomy;you
producearecessionthatincreasesthedeficitstillfurther.Ontheotherhand,donothing
andthedeficitcontinuestoriseandwithitthecostandtimeofrepaymentandtherisk
ofhigherdebtservicingcharges.
Timingiseverything
Itremainstruethatwemustgofiscallytighttoreduceexpenditureandmonetarilylooseto
encourageprivatesectorgrowthbuttheissueiswhen?Atthemomentweareloosefiscally
andmonetarily–andthisistomaintaintheeconomyasawhole.Theindicationsthatweare
emergingfromrecessionandsocansafelyandaggressivelyreducepublicexpenditureare
justnotthere.Inthethirdquarterof2009BritishGDPshowedafurthercontractionof0.4
percent–leadingtothelongestrecessiononrecordofsixquartersofcontinuousnegative
growth.OthercountriesseemtobeemergingfromthedownturnbuttheUKappearsstillto
becontracting.
Thekeyistoproduceprivatesectorgrowththatgeneratesthetaxrevenuetoclosethe
fundinggap,whileraisingpublicsectorproductivitysothatwecandomorewithless.Byso
doingitishopedthatthetwolinesonthedeficitgraph–revenuesandexpenditure–will
starttoconvergeratherthandiverge.TheBritishhavehistoricallylaggedinvarious
productivitymeasurescomparedwiththeUS,FranceandGermany.Thekeydifferenceseems
tobelackofcapitalinvestmentinplantandmachinery.However,thatmightbebecausethe
UKisnowapredominantlyservice-basedeconomythatrequireslesscapitalinvestment.If
so,theninnovationinservicedeliveryandintheservicesectorwoulddeliverreal
productivitygrowth.
Itisherethattheideaofaslimmeddownstateandrealincreasesingrowthcanstarttogain
somerealtraction.Forexample,ifwecanparaphrasetheearliereconomicmodelasone
foundedonanextremeindividualismthatrequiresthestatetopolicetheoutcome,thenthe
structurallinksbetweeneconomicallydamagingself-interestandstatebureaucracybecome
clear.Inshort,ananarchicmarketthathasabandonedtrustandeschewedethosrequiresa
statebureaucracytopoliceitandenforcecontactsandcompliance.Thecostsofthisaudit
stateareenormous.Target-settingdistortsoutcomes,budget-drivencompliancesubstitutes
falsefortruemeasuresandthuserodesservice,drivingupfailureratesandproducingfailure
demand(theriseindemandonaservicebecauseofafailuretocorrectlyaddressthe
probleminthefirstplace–theneedtoseetendifferentpeopletogetabenefitformfilled
incorrectlyorseveraldifferentdoctorstohaveanillnesscorrectlydiagnosed).
Forexample,asPaulLewishaspointedoutinrespectoftheintroductionofquasi-marketsin
theNHS,duringthe1980stheNHSemployedaround1,000seniormanagersandoverall
administrativecostsaccountedforaround5percentofthetotalbudget.By1995,theNHS
employed26,000seniormanagersandadministrativecostshadmorethandoubledrelative
tothetotalNHSbudget,absorbingabout12percentofthetotalbudget(Lewis,
forthcoming).Inwhichcase,anynetgaininefficiencyisabsorbedbyhighertransaction
costs,andthereseemsnorealreasontoassumethattraditionalcontractingoutisreallyany
differentfromthis.
Creatingacivileconomy
Inplaceofthestateincreasingthecostsoftransactionsthroughauditandcompliance
betweentwopartiesthatarefundamentallysuspiciousofeachother,wecouldinsteadbegin
tocreateacivileconomy.Acivilsocietyrequiresbothstateandmarkettobesubordinatedto
amoreeffectivegrowth-engenderingeconomy.Thateconomyservessociety;itboth
demandsandcreatestrust.Trustsoconceivedminimisesandreducesthecostofcompliance.
Ifthecostoftransactionsfalls,thentheregulatoryburdenonbusinessisreducedandif
trustbecomesnormative,morecross-partyventuresarepossibleandsomorebusinessis
engendered.
Thestateonthisaccountistheagentofenforcementforaneconomyofindividual
suspicion.Therightwingcaseforaslimmed-downstateisnot,then,whatoneinitially
suspects–itisnotabouttheoldcontestbetweenprivatisedindividualsandacollectivised
state.Properlyconceived,itrepresentsthefirstsignofanewmutualismandadifferentsort
ofcapitalism.Withlessstateyoucanhavemoresocietyandwithmoresocietyyoucanhave
moreeconomy.Weshouldabandonthelogicthathasledustobothstateandmarket
failure.Withoureconomyincrisisweneedinsteadwhatboththesepseudo-alternatives
havesuppressed:theeconomyofcivilsociety.
BosanquetNetal(2009)TheRoadtoRecovery London:Reform
CentreforEconomicsandBusinessResearchLtd(2009)‘TheUK’spublicsectorproductivityshortfall
iscostingtaxpayers£58.4billionayear…’,pressrelease,23August,availableat
www.cebr.com/Resources/CEBR/Public%20sector%20costs.pdf
HarrisB(2004)TheOriginsoftheBritishWelfareState:Society,StateandSocialWelfareinEngland
1800-1945 Basingstoke:Palgrave
HarrisonF(2006) WheelsofFortune:Self-fundingInfrastructureandtheFreeMarketCaseforaLand
Tax London:InstituteofEconomicAffairs
LewisP(forthcoming)inAllingtonNFBandMcCombieJSL(eds.)TheCambridgeStudentHandbook
inEconomicsCambridge:CambridgeUniversityPress
SmithDB(2006)LivingwithLeviathan:PublicSpending,TaxesandEconomicPerformance London:
InstituteofEconomicAffairs
WilkesG(2009)ABalancingAct:FairsolutionstoamoderndebtcrisisLondon:CentreForum
19.LettingScotlandandWalesgoitalone
IainMcLean
Itisnot,strictly,unthinkablethatScotlandcould‘goitalone’.Thelong-termpolicyofthe
ScottishNationalParty,whichsince2007hasformedaminoritygovernmentinScotland,is
sovereignindependencewithintheEuropeanUnion.InWales,thenationalistparty,Plaid
Cymru,isinagoverningcoalitionwithLabour,butnocredibleproposalsforfull
independencehavebeenmade.
IfthepeopleofScotlandorWalesoptedforindependencethatwouldbetheirchoiceandI
donotthinkpeopleoutsidethosecountriesshouldobstructit.Obviously,anyindependence
negotiationswouldhavetocovertheshareofUKnationaldebtthattheindependent
countrieswouldtakeon.TheywouldalsocovertheapportionmentbetweenScotland(or
Wales)andtherestoftheUKof:
•TheUKContinentalShelf,andtheresultingflowofoilandgasrevenue
•Theassetsandliabilitiesofnationalisedbanks,especiallyRBSandtheformerHBOS
•Defenceassets.
Opportunitiesandimpacts
Whatopportunitiesinausteritywouldspringfromeithercountrygoingitalone?Thepublic
expenditureperheadsavedintherestoftheUKfromtheendingofblockgrantunderthe
‘Barnettformula’,andentitlementprogrammessuchassocialprotectionandpublicsector
pensions,wouldbetrivial,eventhoughtheseblocksloomlargeinScottishandWelshpublic
spending.ScotlandandWalescontainonlyabout13percentoftheUKpopulation.Whatis
largetothemissmalltotherestoftheUK.
TherealopportunitywouldbeforanindependentScotlandorWalestotakeadifferent
approachtotaxingandspending,inthelightofthesubstantialdebtservicingcostsand
shareofbankbailoutsthattheywouldhavetoservice.Theirtaxeffortistoolowunderthe
presentregime.Facedwithahardconstrainttheywouldhavetobeinventive.Therecould
belessonsfortherestoftheUK.
Somethingapproximatingto‘Nationalaccounts’areproducedforScotland(Scottish
Government2009)butnotforWales.TheScottishGovernmentpublicationGovernment
ExpenditureandRevenueforScotland (GERS)showsthatinmostyearsScotland,wereitto
beanindependentstate,wouldhaveastructuraldeficitatpresenttaxandexpenditure
levelsevenassumingthatNorthSeaOilrevenuewasalmostallapportionedtoScotlandas
thenationalistScottishGovernmentwouldlike.Forinstance,GERS2007–08showsScottish
taxreceipts,withalmostallNorthSeareceiptsapportionedtoScotland,amountingto£52.5
billion,andpublicexpenditureinScotlandamountingto£53.3billion(GERS2007–2008,
Tables4.1and6.1).ThelatterfigureisderivedbyapportioningcurrentUKexpenditureon
non-devolvedmatters(defence,debtinterest,internationalservices)proratatopopulation.
If‘nationalaccounts’forWaleswereproduced,theywouldshowanindependentWalestobe
inseverestructuraldeficit.Wales,unlikeScotland,isapoorpartoftheUK.Ithasbelow-
averagetaxreceiptsperheadandabove-averagesocialprotectionperhead.
TheimpactontherestoftheUKofScottishindependencewouldbebroadlyneutralinthe
shortrun,because,veryroughly,thetaxforgonefromtheNorthSeawouldbebalancedby
therestoftheUK’staxpayersnothavingtofinancethehigherpublicspendingperheadin
Scotland.Inthelongerrun,asNorthSearevenuefaltered,therestoftheUKwoulddo
relativelybetteroutofthedealandScotlandrelativelyworse:butthatwouldbetheScots’
problem.TheimpactontherestoftheUKofWelshindependencewouldbemildlypositive
becauseWalesisasmallpartoftheUK.ItsfiscalimpactonWaleswouldbecatastrophic.
Whataboutfiscalautonomyshortofindependence?ThishasbeenproposedbytheScottish
GovernmentinitsNationalConversation(ScottishGovernment2007)andbytheCalman
CommissiononthefutureofdevolutioninScotland(CommissiononScottishDevolution
2009).Itisbeingconsideredbythe(Holtham)IndependentCommissiononFundingand
FinanceforWales,whichhasissuedaninterimreport(IndependentCommissiononFunding
andFinanceforWales2009).Everybodyinthedebate,includinganadhocHouseofLords
SelectCommitteeontheBarnettFormula(2009),believesthatthepresent‘Barnett’
arrangementsareindefensible.Theoptionsonthetableare:reformedgrantsystem;assigned
taxation;ordevolvedtaxation1.Amixedsystem,combiningelementsoftwoorallofthese,
isalsopossible.
Mostcommentatorsbelievethatthemodelforareformedgrantsystemwouldbethe
CommonwealthGrantsCommissionofAustralia,whoseChairgaveevidencetoCalman.A
reformedgrantsystemwouldprobablycutgranttoScotland,wherepublicspendingishigh
relativetoGDP,andincreasegranttoWales,whereitislow.ButaswithScottishorWelsh
independence,thiswouldmakelittlenetdifferencetotheamountavailabletospendper
headintherestoftheUKatagivenleveloftaxation.Itmight,though,haveknock-on
consequencesasregionsoftherestoftheUKqueriedtheirpublic-spending-to-GDPratio–
publicexpenditureperheadinLondon,therichestregionoftheUK,isremarkablyhigh.
BecauseScotspolicymakerscanrationallyanticipatethattheywilldobadlyfromaswitchto
anAustralianregime,theywillopposeit;policymakersinWaleswilllikelysupportit.But
otherwiseamovetoaneeds-basedgrantregimewouldhavelittleeffectontherestofthe
UK.ItmightmaketheScottishgovernmentalittlemorefiscallyresponsibleasithadto
countthepenniesmorecarefully.
Sothemostinterestingterritoryistaxassignmentordevolution,especiallytaxdevolution.
TherearealreadydevolvedtaxesinScotlandandWales.Theyhavecontrolovertheratesand
baseofCouncilTaxandbusinessrates.Scotland(butnotWales)hasthepowertovarythe
standardrateofIncomeTaxbyupto3pinthepound.Thispower(the‘ScottishVariable
Rate’)hasneverbeenused.
Themostsuitabletaxestodevolvearetaxesonthingsthatcannotmove.Taxesonlandand
propertyarethemostsuitablefordevolutionandCorporationTaxistheworst,closely
followedbyVAT.DevolutionofCorporationTaxwouldleadtopretendincorporationsinthe
lowest-taxregime.DevolutionofVATwouldleadtomegastoresineitherCarlisleorGretna
andtoonlinetradersshiftingmassivelyandunstablytowhicheverregimehadthelowest
2
VATrate(itwouldalso,probably,beoutlawedbytheEU). AlthoughunexploitedNorthSea
oildoesnotmove,itisanunsuitabletaxbasefordevolutionbecausetheyieldisvolatileand
unpredictable.
Followingthislogic,pointedoutbyitsIndependentExpertGrouponfinance3,Calman
recommendedthedevolutionofasubstantialproportionofIncomeTaxtoScotland,together
withanumberofrelativelysmalltaxesonthingsandpeoplethatcannotpretendtobe
somewherethattheyarenot(landfilltax,aggregateslevy,airpassengerduty,andstamp
dutylandtax).Themaintaxesonlandandproperty–CouncilTaxandbusinessrates–are
alreadydevolved.FollowingthepublicationoftheCalmanReport,theHolthamCommission
hascalledforevidenceonwhethertaxpowersshouldbedevolvedtoWales,witha
consultationdeadlineof31October2009.
1. Taxes are assigned if the proceeds from a certain territory are handed over to that territory’s government for it to spend as it sees fit but with
the subnational government having no power to change the tax rate or the tax base. They are devolved if the rate and/or the base, as well as the
proceeds, are for the subnational government to determine.
2. This is not an argument against the assignment of VAT revenue to the place it is raised. That would have a modest incentive effect, encouraging
the subnational government to grow its trading economy in order to improve its VAT receipts.
3. See the four volumes of evidence from the Independent Expert Group to Calman at www.commissiononscottishdevolution.org.uk/papers.php.
Morethanthis:Calmancameupwithacunningplan.Theworstaspectofthepresent
arrangementsisthatthegovernmentsofWalesandScotlandhave(spending)powerwithout
(tax)responsibility–theprerogativeoftheharlotthroughouttheages,asStanleyBaldwin
mighthavesaid.InordertoforcetheScottishParliamenttosetanIncomeTaxrate,Calman
proposesthatthelevelofstandard-rateUKIncomeTaxchargeableinScotlandbereduced
from20pto10pinthepound.TheScottishParliamentwouldthenhavetosetaScottish
rate–perhaps10p,inwhichcaseScotland’sfundingstaysthesame;perhaps9p,inwhich
caseittaxeslessandmustspendless;perhaps11p,inwhichcaseitcanspendmorebut
musttaxmore.Inanycase,themarginaldecisionontaxingandspendingthenrestswhereit
belongs–withtheelectedrepresentativesoftheScottishpeople.
Thepowertotaximpliesthepowertoborrow.Sincetaxyieldswouldbelesspredictable
thanthepresent‘Barnett’grant,theScottishandWelshgovernmentswouldhavetohave
thepowertoborrow,bothtosmooththecycleoftaxreceiptsandtofinancecapital
formation.Thiscouldagainbringadoseoffiscalrealism.AsinCanadaandmanyother
countries,themarketcouldrateScottishandWelshgovernmentdebtandthecostofcapital
wouldvarywiththecredibilityoftherelatedfutureincomestream.Thismightcurethe
ScottishgovernmentandpeopleofthebeliefthatthenewForthBridgeandtheBorders
railwayaremannafromheaven.
MakingScotland(oranywhereelse)fiscallyresponsiblealsoalignsincentivesproperly,unlike
now.TheScottishgovernmentwouldhaveadirectincentivetomakeitseconomygrow,
becausethenitcanspendmoreand/orreducethetaxrate.Thiscouldhavereallydramatic
resultsforthetaxesthatnobodyistalkingabout,namelylandandpropertytaxes.Council
Taxisabadtax;soisstampdutyonhousepurchases;andbusinessratesarelittlebetter.
CouncilTaxisseriouslyregressive–thepoorpayproportionatelymorethantherich.Itbears
almostnorelationshiptocurrentpropertyvalues.Itallowshomeownerstoprofitfrom
windfallgainsduetopublicinvestment,suchasanewhospitalortheEdinburghtrams(well,
oneday…).Itgivespeopleinbiggerhousesthantheyneednoincentivetotradedown.
Stampdutyisleviedonanabsurd,corruption-inviting‘slab’systemwhere,abovea
threshold,thewholevalueofatransactionistaxableatthenewrate.Expensivecurtains,
anyone?Therehasalsobeenahugelydistortingexemptionofresidentialpropertyfrom
CapitalGainsTaxsinceConservativeChancellorSelwynLloydabolished‘ScheduleA’of
IncomeTaxin1961.
Atpresent,NIMBYshaveanincentivetoblockeveryplanningapplicationthatwouldgrow
anarea’staxbase.NIMBYshavevotes;thebeneficiariesofdevelopment,suchasfuture
socialhousingtenantsorfutureemployeesofanindustrialdevelopment,donot.Thereare
seriousbiasesagainsteconomicgrowthintheplanningandpropertytaxsystem.
Thesearesomeofthemultiplereasonswhyeverybodywhothinksaboutitseriouslyfavours
anadvalorem landtax.Thereisnorealdifficultyinestablishingthesizeofthetaxbase
(thatis,thecapitalvalueofthelandunderneathhousesandbusinesses)sincethereare
manytransactionsthatarerecordedonanationaldatabase(theLandRegistry)4.The
problemispolitical.Anysuggestiontochangeataxregimeprovokesscreamsfromthelosers
andsilencefromthewinners.Thishappenedwhencounciltaxvaluationswereupdatedin
Walesin2003.Politicianshavenothadthecouragetomovetoadefensiblesystemofland
andpropertytaxation.Ifpublicspendingonthingstheyliketoshowconstituentsatelection
timecametodependonit,theymightfindthecouragetomove.
SpatialeconomiststhinkthattheUKland-useplanningsystemisthebiggestbarrierto
economicgrowthinthecountry5.Agovernmentwiththecouragetotackleitcouldmake
4. I don’t take sides in a 100-year old controversy as to whether the tax base should be simply land (‘Site Value Rating’) or land plus the property
on it. They would have similar results and offer similar incentives to government and taxpayers.
5. See chapters by Nicholas Crafts and Stephen Nickell in Uberoi et al 2009.
hugegainsintaxyieldandeconomicefficiencyatthesametime.ScotlandandWaleshave
thechancetolead–buttherestoftheUKcouldfollow.ScrapCouncilTaxandstampduty,
relocalisebusinessrates,imposeanadvalorem landtaxonhouses.Andifthatdoesnot
soundsexy,inthecentenaryyearofLloydGeorge’sPeople’sBudget,remembertheold
Liberalmarchingsong:
Soundthecallforfreedomboys,andsounditfarandwide,
Marchalongtovictory,forGodisonourside,
Whilethevoiceofnaturethunderso’ertherisingtide:
“Godgavethelandtothepeople.”
Chorus:
Theland,theland,
’TwasGodwhomadetheland,
Theland,theland,
Thegroundonwhichwestand,
Whyshouldwebebeggars
Withaballotinourhand?
Godgavethelandtothepeople.
CommissiononScottishDevolution(2009)ServingScotlandBetter:ScotlandandtheUnitedKingdom
inthe21stCentury,availableatwww.commissiononscottishdevolution.org.uk/uploads/2009-06-
12-csd-final-report-2009fbookmarked.pdf
HouseofLordsSelectCommitteeontheBarnettFormula(2009)1stReportofSession2008-09:The
BarnettFormula.HL139
ScottishGovernment(2009)GovernmentExpenditureandRevenueforScotland2007-2008(GERS),
June,availableatwww.scotland.gov.uk/Publications/2009/06/18101733/0
ScottishGovernment(2007)ChoosingScotland’sFuture,availableat
www.scotland.gov.uk/Publications/2007/08/13103747/4
IndependentCommissiononFunding&FinanceforWales(2009)Fundingdevolvedgovernmentin
Wales:Barnett&beyond, availableat
http://wales.gov.uk/docs/icffw/report/090708barnettfullen.pdf
UberoiV,CouttsA,McLeanIandHalpernD(Eds.)(2009)OptionsforaNewBritain Basingstoke:
Palgrave

Opportunities in An Age of Austerity: Smart Ways of Dealing With The UK's Fiscal Deficit

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1. See for example Alistair Darling’s speech on 8 September (Darling 2009)

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