The immediate focus of the government’s response to the financial crisis has, understandably, been on how to restart the UK economy in the context of a global recession. We have yet to consider, beyond the inclusion of broad figures in the already outdated projections of the pre-budget report, the hard task that lies beyond that – rebuilding a sound framework of public finance.
The automatic fiscal stabilisers of rising benefits and declining revenues will add the largest element to public borrowing. But on top of that the cost of the support given to banks and the relatively small fiscal stimulus to date will leave us with net borrowing in excess of £125bn in 2009-10 and total borrowings of over £1 trillion. Hidden within these figures is the fact that from 2002 onwards we operated with what would seem to have been a structural deficit – even in a period of consistent growth we were running material and non-forecast public deficits. So merely reverting to pre-crisis patterns of spending and revenue-raising (even if it were possible to do that) would see deficits growing still further. On one estimate it will take until 2030 to return public finances to pre-crisis levels.
There are already signs that the scale of future deficits, unbacked as yet by clear strategies on how they may be corrected, are having an impact on the effectiveness of our short-term measures – seen in the dissonance between the Bank of England and government messages and bond market reactions.
The default past response to the need for reductions in deficits has been broad-brush top-down spending cuts. These are the cuts that are easiest to make (to capital expenditure in particular) compared to ones which may require longer gestation but have a more enduring structural impact. However, on the evidence of past programmes such cuts are inefficient. They also produce localised non-strategic savings – a cut in one area which generates an increased cost beyond the responsibility of the accountable manager. We will need new tools.
And we have a limited institutional memory of robust spending management. While the Gershon reviews did yield some material savings (although audits suggests not as much as has been claimed) they were achieved in the ‘comfort blanket’ of general public spending growth – allowing redeployment of resources to new priorities and long paybacks through substantial initial investment. The culture this time will necessarily be very, very different.
So what must we do? First, we should use part of the time bought by the fiscal stimuli to debate the political framework within which we will have to operate. To make serious inroads into the deficit will require far more than annualised savings or economic recovery (especially bearing in mind the large tax takes from banking and the City on which we have relied and which may not return). One estimate suggests that merely to stop the total public debt increasing further will require around a 5 per cent real terms cut in public spending every year from 2011 to 2014.
Second, what will be our political and ethical compass? We have already indicated that tax increases, particularly for higher earners, will play a part in addressing the deficit. We will be operating in a context where most losers will see themselves as victims of the errors or venality of others – a willing partnership of burden sharing will be near-impossible to construct. To even attempt such a partnership it will be necessary to demonstrate that there is a clear ethical governance of what we do.
Third, we must reinforce our strategic armoury. Radical choices will be required. Incremental chiselling will not deliver. Are there parts of public spending which simply cannot be justified in the predictable circumstances of the next decade?
Fourth, we should use the recovery period (when a cuts programme would be counter-productive) to engage with our public sector workforces. In the straitened circumstances of the recession collective bargaining in the private sector on the sharing of burdens has been shown to work effectively, with workforces clearly understanding the need to protect the business in which they work. It will be hard to remove memories of rigid top-down programmes but the dilemma ahead will be to place the choices in sharp focus.
Finally, change programmes typically require leadership quite different from that required to lead a stable organisation. That normally means importing hugely expensive consultants with their Powerpoint slides. Their presence in numbers is a strong impediment to collective burden-sharing. We must accelerate the growth of our own skills and their transference within the public sector.
I have heard it said that the next election will be a good one to lose with the challenges that lie ahead over at least the next 10-year period. If you consider how a Tory government would tackle the same horizon (and in today’s soft media climate they have not been challenged to give even minimal detail) the risks of losing are huge. Our public services will be reshaped and reoriented in this period. In Tory hands what will survive?