Tackling the fiscal crisis: a recovery plan for the UK

The central issue emerging now in the UK – and the one which will dominate politics for the next few years – is the size of the UK government budget borrowing and deficits, and government debt. The stark reality is that much of the deficit does not represent either automatic stabilisers or a deliberate fiscal stimulus; it is “structural” in character and will not be reversed on recovery.

There has been an extraordinary growth in the share of public spending over the last decade: a rise of over 10 per cent of GDP. With the benefit of hindsight it is clear that much of this expansion was based on taxes from the financial services sector and the inflationary housing bubble which was a temporary windfall rather than a secure, permanent source of revenue. However, although some of us warned of the unstable “bubble” character of economic growth, the scale of the structural imbalance was underestimated by everyone, including the independent commentators.

The apocalyptic cries of “national bankruptcy” are unhelpful scaremongering; but the problem is a serious one and a fiscal tightening to the tune of around 8 per cent of GDP over 5 years may well be needed. The current Government’s plans for a correction of 6.4 per cent of GDP over 8 years are optimistic. They underestimate the size of the structural deficit, assuming a brisk economic growth rate of over 3 per cent per annum after 2011-12. They place too much reliance on cuts in capital spending; due to halve from 2010-11 to 2013-14 while current spending will face real cuts of only 2.3 per cent per year. And they fail to address how the tightening will be made from 2014-15 to 2018-19. The risk of declining market confidence and market concerns over inflation leading to an increase in borrowing costs, means a plausible plan to eliminate the structural deficit is critical.

The emphasis for fiscal consolidation must fall on controlling public spending, not higher taxes: to commit to additional tax revenue raising from the outset undermines any commitment to setting priorities in spending. This process will be painful and difficult. It will involve real cuts in many areas and will mean that the big budgets – health, welfare, defence and education – must be tackled. There should be no “ring fenced” areas of spending. Existing spending has to be justified, not simply assumed to be necessary and trimmed at the edges.

The traditional method of “salami slicing” with across-the- board cuts to all services without any priorities being set, causes considerable damage to valued services. Instead, a systematic process of selecting high and low priorities for public spending is needed. Radically decentralising decision making to local government through transferring revenue raising powers would help achieve better value for money. Engaging democratically elected politicians in the choices would inject democratic accountability. The debate should not become distracted by a focus on “efficiency” savings. No doubt public administrators can be made more conscious of costs and efficient management, but it is not credible to believe that greater “efficiency” is a panacea, not least because it has been invariably promised and not delivered in the past.

Nine specific areas of potential savings are identified as a start to a radical programme of reform. The main proposals are:

Zero growth overall for public sector pay (saving £2.4 billion a year), a 25 per cent reduction in the total pay bill of staff earning over £100,000 and a salary freeze and end of bonuses for the civil service (saving £200 million a year).

Tapering the family element of the tax credit – saving £1.35 billion.

A radical review of public sector pensions with the view to moving to higher employee contributions and later retirement ages. There is currently a £28 billion subsidy to unfunded schemes.

Scrapping several major IT systems including the ID card scheme (£5 billion over 10 years), Contactpoint (£200 million over 5 years), the NHS IT scheme (£250 million over the next 5 years) and the proposed “super database” (£6 billion).

Curbing “industrial policy”, including scrapping Regional Development Agencies (£2.3 billion annually) and EGCD subsidies (£100 million annually) and reducing (by at least half) the Train to Gain and Skills Councils budgets (£990 million together a year).

Reforming the National Health Service, by reducing the centralisation and over-administration – starting by scrapping Strategic Health Authorities (£200 million a year) – by strengthening commissioning and with “supply side reform” – in particular tariff reform could save around £2 billion a year.

Curbing the centralisation in education, by cutting national strategies and scrapping quangos – saving around £600 million a year.

Reducing the amount of waste in the defence procurement process, including scrapping the Eurofighter and Tranche 3 (£5 billion over 6 years), the A400M (total cost £22 billion), Nimrod MRA4, the Defence Training Review contract (£13 billion over 25 years) and the Trident submarine successor (£70 billion over 25 years).

Examining possible future public sector asset sales, including some aspects of the Highways Agency (land value of £80 billion) and intangibles such as spectrum, landing rights and emissions trading.

Fiscal policy is political. Politicians must not shy away from explaining in detail how they will tackle the problem of deficits and debt. The proposals outlined in this paper do not constitute an exclusive or exhaustive list. Major, specific areas of potential savings are identified though the examples are illustrative and represent only a first, rough, attempt. Undoubtedly more are required to meet the exacting fiscal disciplines that will be required.