Making fiscal policy sustainable

20 March 2013

Reform held a panel discussion on 19 March 2013 entitled “Pre-Budget Briefing 2013: Making fiscal policy sustainable.” It featured a panel comprising Ben Gummer MP, Sam Fleming (Economics Editor, The Times), Piers Ricketts (Partner, KPMG), and Dr Patrick Nolan (Chief Economist, Reform). The discussion was kindly hosted by KPMG and resulted in a wide-ranging discussion, summarised below.

Reform’s panel discussion highlighted how much further there is still to go in achieving long-term fiscal sustainability. The discussion uncovered a remarkable degree of consensus on the major problems facing the Chancellor as he prepares to deliver one of the most crucial Budgets of recent times. With no economic growth since the commencement of his term in office, and the Government still borrowing over £80 billion each year, it is essential that he tackle the big spending items.

There was universal concern that the Chancellor’s plans so far have failed to address the long-term spending problems. Patrick Nolan discussed Reform’s recent report, Not just a crash diet, which shows that two-thirds of the current deficit is structural and will not evaporate when growth returns. For example, the 55 per cent of welfare spending that goes towards pensions will continue to grow, regardless of the health of the economy. On the Government’s own forecasts that means gross debt will exceed ninety per cent of GDP within the next four years, creating a risk that markets will start to lose confidence in UK debt. As Patrick explained, that is a controversial finding in academia but gambling on its inaccuracy is a risky strategy for an economy that has already flatlined for over five years.

Ben Gummer MP also dwelled on the persistently rising debt levels that the UK has experienced since the turn of the century. He suggested that the problem is the way that Budgets are constructed: they begin with a desired level of spending in each area, rather than working from goals to spending. That leads to salami slicing of individual budgets in each year rather than serious consideration of how money should be reallocated to reflect changing priorities. To refocus politicians’ attention on the distribution of spending, rather than the level, he suggested a fiscal rule that would force the Government to declare the level of spending as a percentage of GDP for the next three years.

Participants generally accepted the need to focus on the long-run reduction of deficits and debt, but there was debate about how that should happen. Some thought that ring-fences around health, welfare, and defence spending have proven divisive within the Cabinet and are hindering the task of dealing with the deficit through spending reform. Others felt that the ring-fences reflect the current social contract, which prioritises these areas of expenditure above others.

Piers Ricketts, a Partner in KPMG’s healthcare division, pointed out that proponents of lower cost healthcare schemes often fail to recognise that they merely redistribute the costs to the private sector. He pointed to the French and German systems as partial insurance models that provide no free lunches relative to the NHS. However, both he and Patrick Nolan were of the opinion that the NHS provides a poor standard of care for the level of expenditure. Ben Gummer noted that there needs to be greater transparency of the true costs of the NHS, and suggested that the Government’s planned tax expenditure statements could help with that.

Despite the discussion’s focus on the long term, there was little optimism that today’s Budget will address pensions and the NHS. Sam Fleming felt that the Chancellor has painted himself into a corner with his insistence on austerity and ring-fences. He suggested that, other than tinkering with childcare and other measures, the Chancellor’s biggest hope for recovery might be a change in the remit of the Bank of England. A change is unlikely to happen until the new Governor arrives, but it is possible that the Chancellor will announce a consultation during this Budget. Consequently, participants were gloomy about the chances of genuine reform in the near term but hopeful that it is achievable if the political will emerges.

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