Opportunities in an Age of Austerity: Smart ways of dealing with the UK’s fiscal deficit

8/14/2019 Opportunities in an Age of Austerity: Smart ways of dealing with the UKs fiscal deficit

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Opportunitiesinan

AgeofAusteritySmartwaysofdealingwiththeUKsfiscaldeficit

EditedbyCareyOppenheimandTonyDolphin

November2009

ippr2009

InstituteforPublicPolicyResearchChallengingideas Changingpolicy

WWW.IPPR.ORG


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ippr|OpportunitiesinanAgeofAusterity:SmartwaysofdealingwiththeUKsfiscaldeficit2

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.WelfarespendingTimetoreassessuniversalbenefits?

byKayteLawtonandKateStanley,ippr ............................................................................. 22

5.TheNHS Canbettercaredeliverbettervalue?

byLizKendall,NHSConfederation..................................................................................... 26

6.Children Spendingonpreventionservices

byPollyNeate,ActionforChildren.................................................................................... 29

7.SchoolsOff-limitsforcutsornot?

bySteveBundred,AuditCommission................................................................................. 32

8.Furthereducation Makingsmartcutsandimprovingefficiency

byPaulLawrence,KPMG.................................................................................................... 35

9.HighereducationCanweaffordnottoinvestinhumancapital?

byClaireCallender,Birkbeck,UniversityofLondon,andDonaldEHeller,PennsylvaniaState

University..............................................................................................................................38

10.PolicinginnewtimesbyRickMuir,ippr................................................................................................................ 43

11.Defence Arealitycheck

byGeneralLordGuthrieofCraigiebankandAndyHull,ippr ............................................. 47

12.TransportHowdoweidentifythepriorities?

byProfessorDavidBegg,TransportTimes.......................................................................... 52

13.LocalgovernmentToughdecisionsahead

byTonyTravers,LondonSchoolofEconomics ................................................................... 55

14.PublicsectorpayTimetosharetheprivatesectorspain?

byBridgetRosewell,Volterra .............................................................................................. 59

Contents


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SectionThree:Thinkingtheunthinkable

15.Letsaskthepublic

byDeborahMattinson,Chime ............................................................................................ 62

16.OpportunitiesfornewtaxesbyPaulJohnson,FrontierEconomics ................................................................................ 65

17.Isthisthefutureanddoesitwork?LessonsfromCanada

byPeterKellner,YouGov.................................................................................................... 68

18.Thecasefortheslimmed-downstate

byPhillipBlond,ResPublica............................................................................................... 72

19.LettingScotlandandWalesgoitalone

byIainMcLean,UniversityofOxford ................................................................................. 76


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TheInstituteforPublicPolicyResearch(ippr)istheUKsleadingprogressivethinktank,producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand

sustainableworld.

Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakinginthe

UK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeand

providepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues.

WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedas

possible,whileourinternationalandmigrationteamsandclimatechangeprogrammeextend

ourpartnershipsandinfluencebeyondtheUK,givingusatrulyworld-classreputationfor

highqualityresearch.

ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:[email protected]

ThisreportwasfirstpublishedinNovember2009.ippr2009

ISBN:9781860303302

Aboutippr


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ClaireCallenderisProfessorofHigherEducationPolicyatBirkbeck,UniversityofLondonandco-directoroftheBirkbeckInstituteofLifelongLearning.

DavidBegg isChairmanofTubelines,NonExecutiveDirectorofFirstGroup,Chairmanof

theNorthernWayTransportCompactandPublisherofTransportTimes.

PhillipBlond isFounderandDirectorofResPublica.

SteveBundredisChiefExecutiveoftheAuditCommission.

TonyDolphin isSeniorEconomistatippr.

GeneralLordCharlesGuthrie istheformerChiefoftheDefenceStaff.

JohnHawksworth isHeadofMacroeconomicsinPricewaterhouseCoopersUKfirmand

editorofitsEconomicOutlookpublications.

DonaldEHeller isProfessorofEducationandSeniorScientist,andDirectoroftheCentrefor

theStudyofHigherEducation,PennsylvaniaStateUniversity.

AndyHullisaSeniorResearchFellowatippr.

PaulJohnson isaSeniorAssociateatFrontierEconomics.

PeterKellnerisajournalist,politicalcommentatorandPresidentoftheYouGovopinionpollingorganisation.

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.

KateStanleyisDirectoroftheCitizens,SocietyandEconomyProgrammeatippr.

TonyTraversisDirectoroftheGreaterLondonGroup,LondonSchoolofEconomics.

Aboutthecontributors


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Nowthatpoliticiansarefacinguptotherealityofthefiscalsituation,itisagoodtimetoexamineopportunitiesforprogressivereforminthetoughfinancialenvironmenttheage

ofausteritythatislikelytodominateinthepublicsectorformuchofthenextdecade.

Thisreportdoesjustthat:ipprcommissionedexpertsfromdifferentfieldseachtolookat

oneaspectoftheproblemoroneareaofpublicspending.

Theproblemandthedebate

TheUKsfiscaldeficit(definedaspublicsectornetborrowing)was77billioninthefirst

halfofthe200910fiscalyearandisontrackfortheBudget2009forecastof175billion

(12.5percentofGrossDomesticProduct)forthefullyear.Fewthinkthedeficitcanbe

sustainedatthislevelforverylongandtheGovernmentsetoutintheBudgetaproposal,

albeitlackingdetails,forreducingitto97billion(5.5percentofGDP)by201314.This

sparkedadebatemiredinafruitlesspoliticalboxingmatchformuchofthesummerover

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

measuresproposedintheBudgetandinlastyearsPre-BudgetReport,andinsteadtofocus

onthespendingsideoftheequation.Thishasledtosomethingofabiddingwaras

politiciansacrossthepoliticaldivideproposemeasuresthatwouldhelptoclosethefiscal

deficit.VinceCable,ShadowChancelloroftheLiberalDemocrats,wasearlyintothefray,

identifyingnineareasofpotentialsavingsasastarttoaradicalprogrammeofreform

(Cable2009).Theseincludedafreezeontotalpublicsectorpay,scrappingseveralmajorIT

projectsandbigcutstothedefenceprocurementbudget.GordonBrownutteredtheword

cutsinaspeechtotheTUCinmid-Septemberandpromisedmeasurestoachievethe

Budgettargetofmorethanhalvingthefiscaldeficit(asashareofGDP)by201314.And

GeorgeOsborne,theConservativesShadowChancellor,usedhisspeechtohispartysannual

conferencetosetoutaseriesofmeasuresdesignedtoreducethedeficit,includingan

increaseinthepensionage,afreezeonpublicsectorpayforthoseearningabove18,000a

yearandrestrictingChildTrustFundpaymentsonlytothepoorestfamilies(Osborne2009).

Themesemergingfromourexpertscontributions

Eachcontributorwasaskedtolookatoneaspectoftheproblemoroneareaofpublic

spendingandtoidentifyopportunitiesforcontributionstoreducingthedeficitthatwouldnotdamageprogressiveaims.Theideawastoseeifcommonthemeswouldemergethat

couldhelpframethedeficitreductionprocess,ratherthantocomeupwithatoptenlistof

Introduction

TonyDolphinandCareyOppenheim


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spendingcuts,ortocomprehensivelyexamineeveryaspectofpublicspendinginthesearch

forsavings.Asaresult,potentialsavings,suchascutsintheGovernmentsITprogramme,

whichothershaveidentifiedandwhichwillalmostcertainlybeimplementedwhoeverwins

thenextelection,arenotmentionedhere.

Anumberofcommonthemesdidemerge.

1.Dontpanic. Thereisadangerthattheclamourfordeficitreductionandpublicspending

cutswillbecomeuncontrollable.Intheabsenceofevidencethatpublicsectorborrowingis

currentlycrowdingoutprivatesectorspending(andwithmonetarypolicyalreadyatan

extremelyloosesetting),cuttingthedeficittoosoonandtooquicklycouldpreventany

economicrecoveryintheUKfromtakinghold.PeterKellnerandPhillipBlondbothargue

thatgovernmentneedstobalancetheneedforfiscalcredibilityinthemediumtermwith

supportfortheeconomyintheshortterm.

2.Planforalonghaul. Deficitreduction,wheneveritcommences,willbealongand

painfulprocess.JohnHawkswortharguesthatthelong-termcostsofanageingpopulation

intheUKnecessitateadditionalfiscaltighteningmeasures,overandabovethoseneededto

reversetheincreaseinthedeficitinthelastfewyears.TonyDolphinrunsthroughthe

arithmeticimplicitinthe2009Budgetandcalculatesthatunlessgovernmentsareprepared

toincreasetaxesfurtherthancurrentlyplanneddepartmentalspendingmighthavetobe

cutbyalmost10percentinrealtermsbetween201011and201314.Undera

ConservativeGovernmentdeterminedtoreducethedeficitmorerapidly,thisfigurecouldrise

tonearer20percent.

3.Dontruleouttaxincreases.Theprospectoftheeffectonpublicservicesofswingeing

cutsinspendingmightforcegovernmentstoreconsidertheneedforfurtherincreasesin

taxes.RickMuirsuggeststhatallthemainpoliticalpartieswillhavetolookafreshattax

measures.PaulJohnsonarguesthat,ifrevenuesaretobeincreased,itshouldbeaspartofa

long-termvisionforreformofthetaxsystem,soastoincreaseitsefficiencyandtheroleof

environmentaltaxes,andnotdoneinanadhocmanner.

4.Politicsisgoingtogettougher.Publicunderstandingofwhatismeantbypublic

spendingcutsortaxincreasesiscloudytosaytheleast.DeborahMattinsonandRick

Muirnotethatpollingevidencesuggeststhepublicfavourspendingcutsovertaxincreases

(thoughtherearecleardifferencesacrosspartylines).Thisappearstobebecausetheythink

spendingcanbereducedthroughefficiencysavingsthatwillnotaffectservices.Giventhe

choicebetweencutsinpublicservicesandtaxincreases,arecentpollsuggestsasmall

majorityinfavourofhighertaxes.PeterKellnerhighlightsevidencefromtheCanadian

Governmentssuccessfuldeficitreductionprogrammeinthemid-1990swhichshowsthatit

iscrucialtocarrypublicopinionandhaveaninformedpublicdebateaboutthechoicesand

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

yearsmeanthattheycannotbesparedfromcutsinanymajorprogrammeofdeficitreduction.And,ofcourse,ring-fencinganareaofspendingaslargeastheNHSorschools

budgetaddssignificantlytothescaleofcutsrequiredelsewhere.


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6.Nowherewillbeoff-limits. Governmentwillhavetomakespendingcutsand

implementreforminareasthathavepreviouslybeenseenasoff-limits.Thisislikelytolead

toconflictwithorganisationsthathavestrongpublicsupport.RickMuirsuggeststhatmajor

reformofpolicingintheUKcouldbothincreasetheeffectivenessoftheforceandsave

money,butmeasuressuchaspayingthepolicebasedonperformanceratherthanlengthofservicewouldprovecontroversial.GeneralLordCharlesGuthrieandAndyHullcallfora

majorreviewofdefenceprocurement,theimmediatecancellationofseverallarge-scale

projectsfortheRoyalNavyandareviewofBritainsnucleardeterrentnotaseriesof

proposalsdesignedtofindfavourwiththeaverageConservativebackbencherbuta

ConservativeGovernmentdeterminedtoreducethedeficitwouldhavetolookatoptions

likethese.

BridgetRosewellarguesthatpublicsectorpayhasoutstrippedprivatesectorpayinrecent

yearsandcouldbehelddown,apolicythatcouldleadgovernmentintoconflictwithitsown

civilservice,whichitwouldprobablyshrugoff,butalsowithdoctors,teachersandnurses,

whowillfindmorepublicsupport.KayteLawtonandKateStanleypointoutthatcutting

welfarepaymentscouldinvolvemeasuressuchastaxingchildbenefitandwinterfuelpaymentsfortheelderly.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.AndDavidBeggarguesthattheneedforextrarevenuesshouldleadgovernmenttolookagainatthemorewidespreaduseofroad-user

charging.This,hesays,wouldrestrictdemandandhelptoeasewhatisthemostcongested

transportsysteminEurope.

8.Learnfromothers.TheCanadianexperienceofcuttingpublicspendinginthemid-

1990shasbeenwidelytoutedasamodelfortheUKgovernmenttofollow,andPeterKellner

looksatitsrelevance.Buttheremightalsobelessonstolearnclosertohome.TonyTravers

pointsoutthatlocalcouncilsacrossBritainhavealreadybeenactiveincontrollingspending

andseekingwaystoincreaserevenuesandthattheywillcontinuetoinnovateinthisarea.

Becausedifferentcouncilswilltakedifferentapproaches,thereshouldbeawiderangeof

experiencetolearnfrom.Inaddition,asIainMcLeanpointsout,thedevolutionofpowersto

theWelshAssemblyandScottishParliamentcreatestwoextrabodiesthatWestminstercanlearnfrom,especiallyiftheyaregivenmoreautonomyovertheirrevenuesandspending.

9.Redistributionisstillpossible.Althoughitismucheasiertoredistributeincomewhen

theeconomyisstrongandrevenuesarebuoyant,itisstillpossibletoredistributewhen

implementingcutsinpublicspending.KayteLawtonandKateStanleyproposeaseriesof

changestochildbenefitandthechildtaxcreditsystem,includingtaxingtheformer.This

wouldreducepublicspendingbutallowmoremoneytobechannelledtolargefamilieson

lowincomesandsoreducechildpovertysignificantly.ClaireCallenderandDonaldEHeller

suggestendingtheblanketgovernmentsubsidyonstudentloansandreplacingitwithmore

targetedsubsidies,sothathigher-earninggraduatespayahigherrateofinterestthantheir

lower-earningcounterparts.

10.Thinklong-term.Oneofthemistakesmadebygovernmentsintentondeficitreductioninthepasthasbeentoforgetaboutthelongtermandmakecutsthatwereeasy

toimplementintheshort.Thiscanleadtohigherspendingorlowerrevenuesinlateryears.


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Spendingmoneyonpreventingproblemsdeveloping,ratherthanonclearingthemuplater,

makesfinancialsenseaswellasbeingobviouslygoodforsociety.PollyNeatemakesthe

casethattargetingresourcesatprogrammestohelpvulnerablechildrencanleadto

significantreductionsinsocialproblemslaterinlifeandLizKendallarguesforashiftinfocus

intheNHStowardsmorepreventionandearlyintervention.Similarly,governmentinvestmentspendingcanincreasetheeconomysproductivepotentialandsohelpgenerate

morerevenuesinthefuture.PhillipBlond(infrastructurespendingacrosstheboard),David

Begg(spendingonthetransportnetwork)andClaireCallenderandDonaldEHeller

(spendingonhumancapitalinhighereducation)allmakethecaseforinvestmentspending

tobesparedfromcuts.

Reducingthedeficit:toughallroundbutcanbedoneinasmartway

Whatdoesthissayabouthowgovernmentshouldapproachthetaskofreducingthebudget

deficit?

Ittellsusthatitwillbeatoughprocesstoughforthepoliticiansthathavetoimplementit,

toughforthosewholosetheirjobsorseetheirworkconditionsdeteriorateasaresultof

cuts,toughforthosewhoreceivelowerbenefitsorworsepublicservices,toughforthose

whohavetopaymoreforsomepublicservices,andtoughforthosewhohavetopayhigher

taxes.

Butitalsotellsusthattherearesmartwaysandnotsocleverwaysofgoingaboutdeficit

reduction.Consideringtaxincreasesalongsidespendingcutsissmart;puttingalltheonusof

deficitreductionondepartmentalspendingisnotsoclever.Preservingspendingon

investmentandpreventativemeasuresissmart;salami-slicingspendingisnotsoclever.

Settingoutthescaleofthelikelyreductioninspendingandservicestogetthepublicon

sideissmart;implementingswingeingcutsinspendingwithoutamandateisnotsoclever.

Beingopentomakingcutsacrossallareasofgovernmentissmart;ring-fencingcertainareas

notsoclever.Tacklingvestedinterestsandimplementingreformwhereitislongoverduearesmart;avoidingconflictwithpopulargroupsnotsoclever.Learningfromothersissmart;

thinkingthatyouhavesomeuniqueabilitytotackletheproblemnotsoclever.Andbeing

awareofwhoisbearingthepainandprotectingthoseonlowerincomesandthevulnerable

aresmart;whilearbitraryspendingcutsandtaxincreasesarenotsoclever.

Taxincreasestohelpclosethedeficitcaneasilybedesignedtobeprogressive.Theconcept

ofmakingaprogressivecutinpublicspendingisnotsuchaneasyonetograpplewith.But

thecontributorstothisvolumehaveshownthatitispossibleforasmartgovernmentto

reducethefiscaldeficitwhileholdingtotheprinciplesthatunderpinprogressivethinking.

Youwillnotagreewitheverythingthateachonewriteswedontbutwehopeyouagree

that,together,thesecontributionshelptoadvancethedebateabouthowthedeficitshould

bereduced.Thechallengeforpoliticians,intherun-uptothegeneralelection,istolifttheleveloftheirdebatetothatfoundhere.

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


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BritainisenteringanageofausterityinwhichpoliticswilllookverydifferentfromhowitdidintheNewLabourera.Thelastdecadewasatimeofplenty:theeconomygrewrapidlyon

thebackofafinanceandpropertyboom,whilelowinterestratesfuelledanexplosionin

householdconsumption.Alargenumberofpeoplefeltalotricherastheirhomesleaptin

valueyearuponyear.

ThisprosperitygeneratedabundantresourcesfortheLabourgovernment,whichdramatically

increasedspendingonpublicservices.Whiletherichgotveryrich,thepoorbenefitedtooas

aresultoftheGovernmentstaxcreditsandextraspending.Itwasthelongestperiodof

continuouseconomicgrowthinmodernBritishhistory.Ineconomicterms,wereallyhave

neverhaditsogood.

Theprospectsforthedecadeaheadcouldnotbemoredifferent.Intheaftermathofthe

collapseofthefinancialsystem,economistsexpectgrowth,onceitresumes,tobemuch

slowerthaninthelast10years.Britainseconomywillbeburdenedwithpayingback

historicallyhighlevelsofhouseholdandgovernmentdebtwhilepreviousenginesofgrowth,

liketheCity,remaintooweaktodrivetheeconomyforwards.Whereasinthelastdecadewe

soughttofinanceScandinavian-stylepublicserviceswhiledemandingAmericanlevelsof

taxation,inthecomingdecadegovernmentsofanypartywillhavetocutspendingandraise

taxes.Weareenteringaustereanddifficulttimes.

Theywillalsobemoreinterestingtimes.Politicsisessentiallytheprocessfordecidingwho

getswhat,whenandhow.IntheeraofNewLabour,thesequestionshadasimpleand,for

Labour,anelectorallysatisfyinganswer:everybodygotmore.Everyyearthenationalpiegot

biggerandeverybodygotalargerpiece,evenifsomepeoplespiecesgrewfasterthan

others.Intimesofplenty,distributiveconflict,whetherbetweenrichandpoororbetween

thepublicandprivatesectors,isdiluted.Aquietpoliticsofconsensusprevails.

Thedecadeaheadwillbenoisierandmorepolarisedpoliticallyasthepartiesbattleoverwho

shouldpaymoreandwhoshouldgetlessinanationstrugglingtopaydownitsdebts.The

collapseoffinancialcapitalismhasalreadyrupturedthecentristpoliticsofthelastdecade.

TheLabourgovernmenthasmovedleftwards,jettisoningNewLabourscommitmenttofree

marketorthodoxy.IthasadoptedKeynesian-stylefiscalandmonetarypolicies,nationalised

highstreetbanks,increasedtaxesontherichandtakenamuchmoreinterventionist

positiontowardsmarkets.

BycontrasttheConservatives,whileacceptingtheneedfortighterregulationandreformin

theCity,haveabandonedtheirpreviouscommitmenttomatchLaboursspendingplans.Astheextentofthepublicdeficithasbecomeclear,theTorieshavereturnedtoMrsThatchers

mantraofgoodhousekeeping,arguingforspeedyanddeepcutsinpublicspendingtoget

thedeficitundercontrol.AtthisyearsConservativepartyconferenceGeorgeOsborne

turnedpreviouspoliticalwisdomonitsheadbyproposingapublicsectorpayfreeze,raising

theretirementageandcuttingsomebenefits.

Recoveryordebt?

Thefirstissueofpoliticalcontentioniswhetherthemainprioritynowistoreducethepublic

deficitorsustaintheeconomicrecovery.TheConservativesandright-leaninganalystsargue

thatpublicspendingshouldbecutnowratherthanwaitinguntil2011astheGovernment

plans(Taylor2009).TheypointtothefactthatBritainhasalevelofpublicdebtunparalleled

inpeacetime,withtheGovernmentnowborrowingoneineveryfourpoundsthatitspends.

Britainwillemergefromthiscrisisin2014withmoredebtasaproportionofnationalincome

thanmostotherdevelopedcountries(Choteetal2009).Theyalsopointtocommentsfrom

theStandard&Poorsratingsagency,threateningtoreviewBritainscredit-worthiness.They

1.Thepoliticsofausterity:taxandspendingafterthecrash

RickMuir


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areconcernedaboutapotentiallossofconfidenceamongbondtradersandinvestors,which

couldraisethecostofgovernmentborrowingandleadtoaslideinthevalueofsterling

(Taylor2009).

TheGovernmentandtheLiberalDemocratstaketheviewthatthisnightmarescenariois

highlyunlikelysolongastheTreasurysetsoutcredibleplansforthemediumtolongtermtogetthedeficitundercontrol.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,allsidesagreethatBritainrequiresafiscalsqueezeatsomepointtoputthepublicfinancesonasustainablepath.Theargumentthenbecomes

whatformthatsqueezeshouldtakeandmostimportantlywhoshouldfeelthepinch.

Taxrisesorspendingcuts?

Shouldthepaincomethroughtaxrisesorspendingcuts?Therightarguesthattaxrises

wouldhampereconomicgrowthandpointstoevidencethatcuttingspendingisthemost

successfulpathtofiscalconsolidation(Taylor2009).TheConservativesarecommittedto

cuttinganumberofpersonaltocuttinganumberofpersonalandbusinesstaxes,including

raisingthethresholdatwhichInheritanceTaxispaidandreducingCorporationTax.Forthe

LiberalDemocrats,VinceCablearguesthatmostofthesqueezeshouldcomeintheformof

spendingcuts,sayingthatdirecttaxescreatedisincentivestosave,workandtakeriskswhileindirecttaxesaregenerallyregressive(Cable2009).

Indeed,despiteearliertalkofLabourinvestmentversusTorycuts,theGovernmentitself

anticipatesthatthreequartersofthefiscalconsolidationwillbemadeupofcutsinreal

levelsofspending.However,ontaxithasalreadydecidedtointroducehigherIncomeTaxfor

topearnersandtoincreaseNationalInsurancecontributions.Therewerenoisesatthisyears

Labourconferenceoffurthertaxrisestocome.Insupportoftheargumentforhighertaxes,

somecommentatorshavecastdoubtontheviewthathighertaxeconomiessufferfrom

lowergrowth.ThereisnosimplecorrelationbetweenthetaxtoGDPratioandthelevelof

economicgrowth,andindeedthehigh-taxScandinavianeconomieshavestronggrowth

records(Dolphin2009).

Thepublicissplitdownthemiddleonthisquestion:36percentfavourprioritisingspendingcutsand38percentincometaxincreases.Thepublictendtodividealongpartylinesonthis

question:Laboursupportersfavourtaxrises,whileConservativevotersfavourspendingcuts.

LiberalDemocratvotersaremoreevenlysplit,butleantowardstaxrises(PageandClark2009).

Neverthelessitisclearthattoputmostoftheburdenofconsolidationontaxriseswouldbe

politicallyunpalatable.TheInstituteforFiscalStudiespointsoutthattoprotect

departmentalbudgetstaxeswouldhavetorise(and/orbenefitsbecut)byabout29billion

ayear,or930perfamily,between2010and2018(Choteetal2009).Nopartywouldbe

abletosustainsuchmassivetaxincreasespolitically.Whateverthebalancechosenbetween

taxesandspending,anygovernmentwillneedtomakespendingcuts.

Whereshouldtheaxefall?Therearethreebroadapproachestoreducinggovernmentspending,althoughanygovernment

islikelytoadoptsomemixtureofallthree.First,thereisthetraditionalmethod,orwhathas

becomeknownassalamislicing.Underthismodeleachgovernmentdepartmentisgivena


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lowerbudgettolivewith,forcingministersandmanagerslowerdownthefoodchaintofind

cuts.Thismethodistemptingpoliticallybecausedecisionsaboutwhatexactlyshouldgocan

bedevolveddowntothelocallevel,absolvingministersfromsomeoftheblame.Itcanalsobe

donequickly,whichistemptingforanincominggovernmentwhichwantstogetthepainover

withwhileitcanstillblameitspredecessorforthemessitinherited.However,thisapproachisrarelythemostprogressiveone.Itisthelessvisibleandmorevulnerablegroupsthattendto

betargetedforreasonsofpoliticalexpediency:carefortheveryelderlyintheirhomes,drug

rehabilitation,mentalhealthservices,socialwork.Marginalisedgroupswillmakelessnoise

thanthemiddleclassparentswhoseschoolsmightotherwisesufferorthestudentswhose

universityfeesmightotherwiseincrease.Salamislicingwillalsomeanareductioninthe

qualityoffrontlineservicesacrosstheboardwithoutaskingquestionsaboutwhatthe

Governmentshouldbespendingitsmoneyon.

Thesecondapproachisthatofprioritisation:governmentcouldundertakeanacrossthe

boardreviewofallaspectsofgovernmentexpenditureandstopdoingthingsthatareless

importantorineffective.ThiswastheapproachtakenbytheChretiengovernmentinCanada

whenitsuccessfullygotthefederalbudgetundercontrolinthe1990s(seePeterKellnersessayinthiscollection).

Thiscanbeamuchmoreprogressiveapproachbecausedecisionscanbemadetoprotect

thoseonthelowestincomesandwiththemostneedsandmakethecutsfallonthose

higheruptheincomescale.Forexample,bothGeorgeOsborneandVinceCablehave

proposedendingmiddleclassentitlementstobenefitsandtaxcredits.ThejournalistPolly

Toynbeerecentlyarguedthatifcutsaretobemadetotheeducationbudget,itwouldbe

moreprogressivetocuttheuniversitybudget,fromwhichmiddleclassfamilieslargely

benefit,ratherthantocutpre-schoolandprimaryschoolbudgetswhicharesoimportantfor

childrenslifechances,particularlythosefromlowincomefamilies(Toynbee2009).

Thethirdapproachistoreformthewaypublicserviceswork.Thisisperhapstheleast

politicallysatisfactoryintheshortrun.Structuralchangesinevitablyinvolveconfrontationswithpublicsectorstaff.Theyalsobringfiscalbenefitsmuchfurtherdownthetrack,very

oftenbeyondthelifetimeofasinglegovernment.Reformsmayalsoneedtobefront-

loaded,needingmoremoneytogetthemofftheground,whichishardtojustifyduringa

timeoffiscaltightening.Nevertheless,ifitisdoneright,reformtothewayservicesworkcan

securetheholygrailofimprovingservices,whilesavingmoneyatthesametime.

Conclusion

Britishpoliticswilllookverydifferentintheyearsahead:morepolarisedideologicallyandset

againstanimposingbackdropoffiscalausterityand,potentially,greatersocialconflict.

Britishgovernmentsofanypoliticalhuewillneedtoincreasetaxesandcutpublicspending.

Thepoliticaldebatewillbeoverhowmuchfiscalconsolidationisrequired,whatthebalanceshouldbebetweenhighertaxesandspendingcutsandwhatservicesshouldbecutand

whichsocialconstituenciesprotected.

CableV(2009)Tacklingthefiscalcrisis:ArecoveryplanfortheUKLondon:Reform

ChoteR,CrawfordR,EmmersonCandTetlowG(2009)Britainsfiscalsqueeze: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)Howtosave50billion,BigPicture,Quart3,No.4,London:InstituteofDirectors

ToynbeeP(2009)Weneedclevercutsnotslashandburn,TheGuardian,30September


13/79


TherehastobeageneralelectionintheUKbyJune2010.Thegovernmentthatisformedafterthatelectionwillfaceanenormouschallengewhenitdrawsupplanstobringthefiscal

deficitbackdowntoasustainablelevel.

Afterjustsixmonthsofthe200910fiscalyear,thebudgetdeficit(definedaspublicsector

netborrowing)alreadytotals77billionanditisontracktoreach,orevenexceed,thefull-

yeartotalof175billionforecastintheApril2009Budget.Thiswillbetheequivalentof

12.5percentofgrossdomesticproduct(GDP)and,bysomemargin,thelargestdeficit

recordedintheUKsincetheSecondWorldWar.

EvenforsomeonefullycommittedtotheKeynesiannotionofanactivefiscalpolicyto

supporttheeconomywhenitisinrecession,thisisaneye-wateringlylargedeficitandit

cannotbesustainedatthislevelforverylongwithoutleadingtoanexplosiveincreasein

governmentdebt.Evenifthedeficitishalvedby201314,debtwillincreasefrom36.5per

centofGDPin200708toover75percentin201314.Withouteffortstoreducethe

deficit,debtcouldeasilyreach100percentbythemiddleofthenextdecade.Andhigher

levelsofdebtwillbeaccompaniedbyhigherinterestpayments,whichwillmeaneither

highertaxesorcutsinotherspendingtofundthem.

Thenextgovernmentwill,therefore,facetwotoughfiscaldecisions:

Howquicklytoreducethedeficit

Whatcombinationoftaxincreasesandspendingcutstomaketoachievethedesiredreduction.

HowtoquicklyreducethedeficitThecurrentgovernmentsapproachtothefirstdecisioncanbecharacterisedassecurethe

economicrecoveryfirstandthenreducethedeficit1;whiletheConservativeopposition

favourscutthedeficitnowastheonlywaytogenerateaneconomicrecovery2.

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

2. See David Camerons speech on 8 September (Cameron 2009a)

2.Thescaleofthechallenge

TonyDolphin

-2

0

2

4

6

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-01

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-04

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-07

2009

-10

2012

-13

% of

GDP

Years

Figure2.1.

Publicsectornet

borrowing(%

GDP)

Source:HMTreasury,

Budget2009


14/79


ThecurrentgovernmentsetoutitsplanfordeficitreductionintheApril2009Budget.Its

medium-termprojectionseesthefiscaldeficitbeingcutfrom175billion(12.5percentof

GDP)in200910to97billion(5.5percent)in2013143.However,itdoesnotplanany

significantreductionin201011,forfearofderailinganeconomicrecoverythatwouldonly

beinitsfirstyear.

TheGovernmentsplanhasbeencriticisedbyDavidCameronandGeorgeOsborne,who

havemadeitclearthataConservativegovernmentwouldcutthedeficitmorequicklyand

moreaggressively.InhisresponsetotheBudget,forexample,DavidCameronsaid,the

Budgetstilldoesnotdoenoughtogetthepublicfinancesundercontrol.Intwowords,itis

completelyinadequate(Cameron2009b).TheConservativeshaveyettospecifyexactly

whattheyregardasanadequatedeficitreductionplanbut,giventhelanguagetheyhave

usedtocriticisetheGovernmentsplans,theywouldsurelytargetlowerdeficitsthanthose

setoutintheBudgetineveryyearfrom201011to201314.Ratherthan97billion(5.5

percentofGDP)in201314,theymightaimforadeficitofaround50billion,or3per

centofGDP(thoughthiswouldimplyareductioninthedeficitequivalentto9.5percentof

GDPinthespaceofjustfouryearssomethingneverachievedbeforeintheUK).Thedifferentapproachesofthetwomainpartiestothespeedofdeficitreductionreflect

oneoflongest-standingdebatesineconomics.TheLabourapproachisbackedby

economistswhobelievethatfiscalpolicyshouldbeusedtosupporttheeconomybecause

monetarypolicyisprovingineffective;theConservativeapproachbyeconomistswhobelieve

thathigherdeficitsleadtohigherinterestrates,whichcrowdoutactivityintheprivate

sector.WinnersoftheNobelPrizeforEconomicscanbefoundinbothcampsandthisisa

debatethatwillcontinuelongafterthepresentcrisisisover.

However,cuttingthedeficitmorequicklythanplannedinthe2009Budgetdoesappearto

berisky.Theplannedreductionoverthefouryearsbetween200910and201314is

alreadyequivalentto7percentofGDP,identicaltothereductioninthedeficitbetween

199394and199798(from7.7to0.7percentofGDP).Butthiswasachievedduringaperiodofstrongeconomicgrowthwhenconsumerandinvestmentboomswerefuelledby

risinghouseholdandcorporatedebt.Growthoverthenextfewyearsislikelytobeweaker,

makingdeficitreductionthatmuchharder.Whatismore,officialinterestratesarealreadyat

just0.5percentandtheBankofEnglandhasembarkedontheuncertainpolicyof

quantitativeeasing.Thescopetoprovideafurthermonetarystimulustotheeconomyifit

weakensasaresultofatighterfiscalpolicyisextremelylimited.Ifthedeficitisreducedtoo

soonortoofast,economicgrowthcouldbehighlyanaemicoverthenextfewyears,and

insufficienttobringaboutareductioninunemployment.

Taxincreases

Theseconddecisionfacingthenextgovernmentisthecombinationoftaxincreasesandspendingcutsthatwillbeusedtoreducethedeficit.Herethegapbetweenthetwomain

partiesis,perhapssurprisingly,smaller.Bothseemtohaveoptedformodesttaxincreases,

withspendingcutstakingmostoftheburden.

Thecurrentgovernmenthasalreadyannouncedaseriesofmeasurestoincreaserevenues

fromtaxandNationalInsurancecontributions(NICs)4.Thesemeasures,andtheeconomic

recovery,areprojectedtolifttaxrevenuesfrom33.0percentofGDPin200910to35.3

percentin201314,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 201718. See HM Treasury, Budget

2009 (p.19)

4. These include increases in employee and employer national insurance contributions from 201112 and an additional tax rate of 50 per cent on

income above 150,000 from 201011.


15/79


itcouldincreasetaxesinahiddenwaywasbyfreezingincometaxallowancesandallowing

revenuestogoupaslargewageincreasesliftedpeopleintothetaxsystemandhighertax

brackets(theyrepeatedthistrickinthe1990s).Extremelylowinflationmeansthisoptionis

notavailablenow.Taxincreaseswillhavetobemoreexplicit.

Thepoliticalpartieswillbereluctanttospecifyanyparticularincreasesaheadoftheelection,

butthereareseveraloptionsthattheycouldconsiderafterit.Are-electedLabour

government,forexample,mightattemptamajorclampdownontaxavoidance,whichthe

TaxJusticeNetworksuggestscosts25billioninlostcorporateandpersonaltaxrevenues

everyyear(Christensen2009),whiletheConservativesarereportedtobeconsideringan

increaseinthemainrateofVATto20percent,whichwouldraiseanadditional12billionin

revenues(HMTreasury2008).Bothpartiescouldincreasegreentaxes.Forexample,the

introductionofacarbontaxof25pertonneofCO2 wouldraiserevenuesof3.5billion.

However,bothanincreaseinVATandacarbontaxwouldberegressive,hittinglow-income

familiesdisproportionatelyhard.Thiswouldnotbeajustwaytoclosethedeficit.Iftaxeson

individualshavetoincrease,thefairestapproachwouldbetoincreaseincometaxrates(and

theradicaloptiontoabolishtheupperearningslimitonNationalInsurancecontributions).

Butafterthreedecadesofcuttingincometaxrates,itseemsnoneofthemainpolitical

partiesarepreparedtomakethiscase(thoughtheplannedintroductionofa50percent

rateforthoseonveryhighincomesislikelytosurvive,whoeverwinsthenextelection).

Hence,thepoliticalconsensusisthatpublicspendingwillhavetobecut.

Spendingcuts

TheBudgetforecaststotalgovernmentspending(currentandcapitalexpenditure)of671

billionin200910,equivalentto47.5percentofGDP,risingto48.1percentofGDPin

201011,beforecomingdownto43.4percentofGDPby201314.Inrealterms(thatis,

afterallowingforinflation)totalspendingisprojectedtocontractby0.1percentayear

between201011and2013145.

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.

30

32

34

36

38

40

42

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48

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Taxes and NICs

Total receipts

Figure2.2.

Government

receipts(%of

GDP)

Source:HMTreasury,Budget

2009


16/79


overthenextfewyearsdebtinterestpaymentswillgrowrapidlyasaresultoftherisein

governmentdebtcausedbylargefiscaldeficits.6 Second,therewillbesignificantincreasesin

spendingonsocialsecuritybenefitpayments(unlessentitlementsarechanged).7 Asaresult,

therewillbeasignificantsqueezeondepartmentalspending.TheBudgetplansare

consistentwithacontractionintotaldepartmentalspendingbetween201011and

201314of9percentinrealterms.Currentspendingcouldfallby6percentandcapital

spendingby25percent.

TheBudgetcontainsdetailedspendingplansonlyupto201011,sothetoughdecisions

aboutexactlyhowspendingwillbecuthaveyettobemade.However,seniorfiguresinthe

LabourGovernmenthavesuggestedthathealthandchildren,schoolsandfamilies,willbe

protectedfromrealcutsinspending.Thisincreasesthescaleofthecutsrequiredbyother

departments.

Evenifthisprotectiononlyextendstocurrentspending(theGovernmentcouldarguethat

thereislessneednowtobuildschoolsandhospitalsaftertheinvestmentinrecentyears),

theBudgetprojectionssuggestthatspendingbyotherdepartmentswillhavetocontractby

12percentinrealtermsbetween201011and201314.Thiscannotbeachievedby

efficiencysavingsalone.Are-electedLabourGovernmentwouldalsohavetoconsidermajor

-6

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1998

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2007

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2010

-11

2013

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%

Years

Figure2.3.Real

growthintotal

managed

expenditure(%)

Source:HMTreasury,Budget2009and

authorscalculations

-10

-5

0

5

10

15

Curre

nt

spen

ding

Debt

inter

est

Socs

ecurity

bene

fits

Othe

rman

aged

spen

d

Dept

curre

nt

spen

d

Dept

capita

l

spen

d

Tota

ldep

t

spen

d

%

Figure2.4.

Annualchange

inrealspending,

201011to

201314(%)

Source:HMTreasury,

Budget2009and

authorscalculations

6. The Budget projects a rise in net debt from 792 billion in 200910 to 1370 billion by 201314. Leaked HM Treasury figures suggest gross

interest payments might increase from 27 billion in 200910 to 64 billion in 201314.

7. Leaked HM Treasury figures project an increase from 166 billion in 200910 to 193 billion in 201314.


17/79


18/79


Therecentpublicdebatehasfocusedonthemedium-termchallengeofgettingUKpublicdebtbackundercontrol1,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

equivalenttoaround58billionat2009GDPvalues.

PressuresonspendingThereare,ofcourse,agreatmanyuncertaintiessurroundingsuchlong-termprojections.

However,theseuncertaintiesarenotareasontodismissthepotentialchallengeofrising

age-relatedspendingastherearegoodreasonstobelievethattheestimatesinTable3.1

could,ifanything,provetobetoolow:

AstheTreasurys2008long-termpublicfinancereportacknowledges,itdoesnottakeintoaccountnon-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).

3.Howcanwemeetthefiscalcostsofanageingpopulation?

JohnHawksworth

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 1.8Totalage-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)


19/79


FollowingthePensionCommissionreportin2006,theUKgovernmenthasputinplacealong-termpensionreformsettlementthatisintendedtobelasting,includinga

gradualincreaseinstatepensionageto68by2046,withfurtherincreasesthereafter

inlinewithrisinglifeexpectancy.Theeffectsofthishigherstatepensionageand

relatedrisesinparticipationratesbyolderworkersarealreadyfactoredintotheTreasuryprojections,sogoingmuchbeyondthiswillnotbeeasy(althoughitmaywell

provenecessaryasanalternativetofurtherlargetaxrises,asdiscussedbelow).

Asthemedianageofthevotingpopulationincreases,thepoliticalpressureforadditionalage-relatedspending,overandabovethatimpliedbycurrentpolicies,

seemslikelytoincreaseinfuturedecades.

Thereareareassuchasinternationalaid,measuresaimedatchildpovertyreduction,childcare,transportinfrastructuredevelopmentandsocialhousingwherethepressures

areforrisingspendingasashareofGDPinordertomeetlong-termpolicyobjectives.

Ongoinggovernmenteffortstoimprovepublicsectorproductivitythroughinitiatives

suchastheOperationalEfficiencyProgrammeandthePublicValueProgrammeareimportantandneedtobeembeddedinastrongpublicsectorcultureofcontinuous

performanceimprovementbackedbyministersandtopcivilservants.Itislikely,

however,thatsuchefficiencyimprovementsareimplicitlyalreadybuiltintocurrent

governmentspendingprojectionstoasignificantdegree.

EvenifthepossibledownwardbiastoTreasuryspendingprojectionsinareaslikehealthis

discounted,however,thefactthattheprojectionsareuncertainonlyaddstothearguments

forstartingtomakeprovisionforthesepotentialcostsearlierratherthanlater.Indeed,

makingsuchprovisionscouldbeseeninpartasofferinganinsurancepolicyagainstthese

uncertainties.Ifspendingdoesnotriseasfarasprojected,someoftheseinsurance

premiumscouldbereturnedtofuturetaxpayersorusedtopaymoregenerouspensionsor

tofundadditionalNHSspending.Butifspendingrisesfurtherthanexpectedandnosuchinsurancehasbeentakenout,thenverylargetaxincreasesmightneedtobeimposedon

futuregenerationsofworkers,withpotentiallymuchmoredamagingeconomic

consequencesthanifearlierprovisionhadbeenmade.

AsillustratedbytheupperlineinFigure3.1below,whichincludesthefiscalcostsofageing

butassumesnofurtherpolicyactionbeyondcurrentplans,delayinaddressingthechallenge

ofageingcouldleadtoanunsustainableupwardspiralinUKpublicdebtinthelongerterm.

0%

20%

40%

60%

80%

100%

120%

20072010201320162019202220252028203120342037204020432046204920522055

With ageing

Without ageing

Figure3.1.

Alternative

scenariosfor

publicsectornetdebtusing

Treasury

projectionswith

andwithout

costsofageing

Source:PwC

projectionsusing

Treasurydata


20/79


Needforfiscaltightening

Toavoidsuchanoutcome,afurthersignificantfiscaltightening(throughhighertaxesor

lowerpublicspendingthantheTreasuryprojects)willbeneededinthelongrunoverand

abovethemeasuresneededtohalttheriseinpublicdebtbetweennowand2017/18.We

have,therefore,developedamodelthatupdatestheTreasuryslong-termprojectionsfromMarch2008toallowforsubsequenteventsandthenewmedium-termTreasuryfiscal

projectionsupto2017/18,assetoutintheApril2009BudgetRedBook.Thisallowsusto

investigatedifferentoptionsformeetingalternativepublicdebtreductiontargetsgiven

thesefuturecostsofageing(thismodelwasalsousedtogeneratethedebtscenariosshown

inFigure3.1).

AssummarisedinTable3.2,ouranalysissuggeststhat,dependingontheparticulardebt

targetandtimescaleadopted,anadditionalfiscaltighteningby2017/18oftheorderof1.7

to3.0percentofGDPwouldbeneededtocoverthecostsofageing.Thistranslatesinto

around25to43billionperannumat2009GDPvaluesoraround1,000to1,700on

averageperhousehold.Thisisoverandabovethecumulativediscretionaryfiscaltightening

equivalentto6.3percentofGDPalreadysetoutinthe2008Pre-BudgetReportandthe2009Budgetinordertoreturnthecurrentbudgettobalanceby2017/18,whichisthe

Treasurysnewmedium-termoperatingrule.

Table3.2assumesthattheadditionalfiscaladjustmenttocoverthelonger-termcostsof

ageingoccursnolaterthan2017/18.Thelongerthisadjustmentispostponedbeyondthis

date,thelargeritwillneedtobe.Thescaleofthefiscaladjustmentcouldbereducedif

workinglivesandstatepensionageswereincreasedmorerapidlythancurrentgovernment

policyandTreasuryprojectionsassume3,butwhetherthemajorityofvoterswouldprefer

workinglongerinreturnforpayingsomewhatlowertaxesremainstobeseen.

Itisclear,therefore,thatmeetingthelong-termcostsofageingintheUKwillrequireasignificantfurtherfiscalsqueezeinthemediumtolongrun,aswellasareassessmentofkey

aspectsofpolicyonstatepensionsandextendingworkinglives.

Thisinevitabilityreinforcesthecasefortakingfirmactiontoreducethebudgetdeficitto

moremanageablelevelsassoonastherecessionissafelyover,soastogetthepublic

financesbackinreasonableshapebythemiddleofthenextdecadepriortohavingtoface

uptothenextfiscalchallenge:thatofanageingpopulation.

3. National Institute estimates (Barrell et al2009) 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.

Table3.2:Estimatedadditionalfiscaltighteningneededby2017/18tomeetalternativepublicsectornetdebttargets

Additionalfiscaltightening %ofGDP billionperannum perannum

needed at2009GDPvalues perhousehold(at

2009values)

Reducedebtto50%GDPby2047/48 1.7 25 1,000



Source:PwCanalysisbasedonHMTreasuryprojectionsNote:FinalcolumnbasedonOfficeforNationalStatisticsestimatethattherearearound25millionhouseholdsintheUK.

Cashfiguresareallexpressedat2009GDPvalues.Finalcolumnisroundedtoavoidspuriousaccuracy.


21/79


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


22/79


Inthefaceofoncomingausterity,nopublicspendingcansimplycontinuewithoutscrutiny.Allspendingmustbesubjecttorobusttestsofprovidingpublicvalue,meetinga

demonstrableneedandcontributingtoprogressivegoals.Thismustincludespendingon

welfarebenefits.Wecannotsimplyassumethat,becausewelfareisanintrinsicpartofthe

progressivevisionofasocietythatsupportsthosewhoareworstoff,thecurrentsystem

shouldremainuntouched.Welfaremustalsobesubjecttotestsofpublicvalue.

Difficultpoliticaldecisionswillhavetobemadeanditdoesnotgetmuchtougherthan

makingchangestobenefitsfortheyoungandtheoldthatwillcreatelosersbut

governmentmighthavetogothere.Inthischapterweexaminesomeoftheoptions.

Universalbenefitsforchildren

Thestateprovidesincomeandservicestosupportfamiliesinraisingtheirchildrenbutherewefocusonthebig-ticketincometransfer:ChildBenefit.

ChildBenefitisthesacredcowofthewelfaresystem.Ithasveryhightake-upratesand

passionatesupportacrossthepoliticalspectrum.Itisalsoaveryeffectivevehiclefor

reducingchildpoverty,simpletoadministerandeasytounderstand.Butitdoeshave

limitationsandthetimehascometimetolookatalltheoptionsinharnessingthepowerof

ChildBenefittoreachthepoorestchildren.

TheprimaryreasonforreformingChildBenefitisthat,asauniversalbenefit,itisverypoorly

targetedandexpensivetoincrease.In2008/09ChildBenefitcost11.3billion,makingit

oneofthemostcostlybenefitsforgovernment.

ThestructureofChildBenefitalsogeneratesinequalitybetweenlargeandsmallfamiliesbypayingalowerrateforsecondandsubsequentchildren.FromJanuary2009,theChild

Benefitratefortheeldestoronlychildwas20aweek,comparedwith13.20foreach

additionalchild.Povertyisconcentratedinlargerfamiliessothisisamajorchallenge

(DepartmentforWorkandPensions2009).Inaddressingthisstructuralproblem,byraising

therateofChildBenefitforsecondandsubsequentchildrentotheratepaidforfirstchildren

andsoliftingasignificantnumberofchildrenoutofpoverty,wewouldaddsignificantlyto

theChildBenefitbill.

ManycampaignersandsupportersarguethatanychangestoChildBenefit(exceptrate

increases)areundesirablebecausethebenefitisaneffectivewayofgettingmoneytopoor

familiesandanymeddlingcouldbethefirststeponaslipperyslopetoeventualdenigration.

However,thereiscross-partysupportforauniversalChildBenefitasaprincipleanditisdifficulttoimagineanypartywantingtopickthisparticularfight.Itisperfectlypossibleto

arguethatreformingChildBenefitnow,atthistimeofausterity,willinfactprotectitfor

generationstocome.

Oneveryimportantargumentmadebysupportersofthestatusquoisthatuniversalbenefits

ofwhichChildBenefitisthemostsignificantarecrucialinensuringsupportforthewelfare

systemasawhole,especiallyamongthebetteroff(White2003).Thisiscertainlyaserious

consideration.However,newpollingdataforipprsuggeststhatstraightforwarduniversalism

mightnotbeasnecessarytoachievingthiscollectivespiritasisoftenargued.Inapollwe

commissionedinSeptember2009ofover1,000peopleinmarginalelectoralconstituencies,45

percentofpeoplesaidtheywouldbemorelikelytovoteforapartythatpledgedthatfuture

increasesinChildBenefitwouldonlygotolowerincomefamilies.20percentofthosepolledsaidtheywouldbelesslikelytovoteforsuchaparty.Theremainingonethirdeitherdidnot

knoworsaiditwouldnotmakeanydifferencetotheirvotingdecision 1.

1. Polling conducted by Brand Democracy on behalf of ippr. Brand Democracy polled 1,042 adults between 16 and 18 September 2009.

4.Welfarespending Timetoreasessuniversalbenefits?

KayteLawtonandKateStanley


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Sowhataretheoptionsforreformsthatwouldprovidepublicvalue,meetneedsand

supportprogressivegoals?Inotherwords,howdowegetgreaterbangforthetaxpayers

buck?Theprioritymustbetoensurethatmoremoneygetstolowerincomefamilies

especiallywhenunemploymentisrising,andwithittherateofchildpoverty.

OneoptionwouldbetotaxChildBenefitandusetheadditionalrevenuetoincreasetherateofBenefitpaidtosecondandsubsequentchildren.Taxationispreferabletomeans-testingas

awayofredistributingresourcesbecausetheeffectontake-upwouldbeminimised.Means-

testedbenefitstendtosufferfromrelativelylowtake-uprates.

However,theeffectoftaxingChildBenefitworth20aweekwouldbereducethenetvalue

ofthebenefitto16aweekforbasicratetaxpayers.Familieswithmorethantwochildren

wouldbenefitoverallbecausetheywouldreceiveahigherlevelofbenefitforthesecondand

subsequentchildren.Butfamilieswithoneortwochildrenwouldloseoutoverall.We

thereforeproposeraisingtherateofChildBenefitpaidforallchildrento22aweek.This

wouldmeanthatbasic-ratetaxpayingfamilieswithtwochildrengainoverall.Table4.1shows

thenetweeklyvalueofChildBenefitifitwerepaidatarateof22aweekandtaxed.

FurtherresourcescouldbemadeavailableifeligibilitytoChildBenefitwereremovedfor

childrenaged16oroverinhigherincomefamilies.Thiswouldensurethatlow-income

familiescontinuedtoreceivefinancialsupportforchildrenover16infull-timeeducationand

training.Inthelongterm,ChildBenefitforover-16sineducationortrainingcouldbe

combinedwiththeEducationalMaintenanceAllowancetoprovideastreamlinedsystemof

financialsupportforyoungpeoplefromlow-incomefamiliesparticipatinginpost-16

educationandtraining.

Elsewhere,wehavearguedthatentitlementtoChildTaxCredit(CTC)shouldberemoved

fromfamilieswhoareonlyeligiblefortheFamilyElementofCTC(CookeandLawton2008).Thisiscurrentlyworth10.48aweekandispaidtoallfamilieswithchildrenwitha

householdincomeupto50,000,meaningthatnineoutof10familiesareinreceiptofCTC.

ModellingbytheInstituteforFiscalStudieshasshownthattaperingthefamilyelementof

CTCtoarateof39percentassoonasafamilysincomemakesthemnolongerentitledto

thechildelementofCTCwouldsaveabout1.35billion(Breweretal2008).Thischange

wouldaffectabout2millionfamiliesandwouldmeanthatfamilieswithanincomeofabout

27,500ormorewouldnolongerbeeligiblefortaxcredits.

Usingtheipprtax/benefitcalculatorwehavemodelledapackageofreformstoChild

Benefitwhichincludesthefollowingmeasures:

IncreasingtherateofChildBenefitpaidtoallchildrento22aweekTaxingChildBenefitbasedontheincomeofthehighestearnerinafamily

RemovingentitlementtoChildBenefitfromyoungpeopleaged16oroverwherehouseholdincomeisover25,000.

Table4.1:ThenetvalueChildBenefitwouldhaveperweekifitwereincreasedto22andtaxed

Grossannualincomeof Scenario under: NetvalueofChildBenefitperweek

highestearnerinafamily

Onechild Twochildren Threechildren Fourchildren

Lessthan6,475 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

Over37,400 currentarrangements 20 33.20 46.40 59.60

ipprproposals 13.20 26.40 39.60 52.80


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Weestimatethatthispackagewouldremove350,000childrenfrompoverty,makinga

significantcontributiontothegoaloferadicatingchildpoverty.Thenetcostwouldbe

approximately770million.However,ifweaddinthesavingsgeneratedbythechangesto

entitlementtoCTCforhigherincomefamilies,assetoutabove,overallsavingsof

approximately600millioncouldbeachieved.Thesemeasurescombinedwouldredirectlimitedresourcestowheretheyaremostneededandgeneratesignificantsavingsforthe

publicpurse.

AnalternativeoptionwouldbetousetherevenueraisedfromtaxingChildBenefitto

increasetheChildElementofCTCs,insteadofincreasingtherateofChildBenefitpaidto

additionalchildren.However,thereisastrongargumentforincreasingthelevelofChild

Benefitpaidtoadditionalchildrenonthegroundsoffairnessandalsobecauseithelpsto

tackletheconcentrationofchildpovertyinlargefamilies.

Inthelongterm,amorecomprehensiveoptionwouldbetocombineChildBenefitandthe

ChildTaxCreditintoasingleprogressiveuniversalchildrensentitlement.Thiscouldinvolvea

universalfloor(throughChildBenefit)withameanstest(throughtheCTC).ChildBenefit

wouldboosttheFamilyElementoftheCTCandraisethelevelofCTCacrosstheboard.Thiswouldhavetheadvantageofcreatingasingleentitlementwithinastronglyprogressively

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.

WinterFuelPaymentsEveryoneovertheageof60isentitledtoWinterFuelPayments(WFPs),whicharedesigned

toboosttheincomesofolderpeopleandalsoformoneelementoftheGovernmentsfuel

povertystrategy.Paymentsrangefrom125to400ayear,dependingonage,living

arrangementsandentitlementtootherbenefits,buteveryoneover60getssomething

eveniftheyareinworkoronhighincomes.WFPscosttheGovernment2.7billionin

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).


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of,WFPsmeansthattake-upisveryhighandtheyarereceivedbythosepensionersonvery

lowincomeswhofailtoclaimtheirentitlementtoPensionCredit.

Althoughtheymaybenefitsome,itisclearthatWFPsrepresentsignificantandpoorly

targetedexpenditure,andarethereforeinneedofreforminthecurrentcontext.The

Environment,FoodandRuralAffairsSelectCommittee(2009)hasrecommendedtaxingWFPsforbasic-ratetaxpayersandendingentitlementaltogetherforhigher-ratetaxpayers.

Thesemeasurescombinedwouldsave250millionayear,about10percentofcurrent

spendingonWFPs,andshouldbeseenasafirststeptowardsreducingexpenditureonthis

benefit.

Entitlementtothepaymentsshouldberemovedfrompeopleaged60to64asthestate

pensionageforwomenrisesto65in2020.Morebroadly,amajor,well-targetedprogramme

ofdomesticenergyefficiencyimprovementswouldbeamoresustainablewayofreducing

fuelpoverty(andtacklingclimatechange)andmaymeanthatthelevelandentitlementto

WFPcouldberevisitedinfuture.

ConclusionInthechallengingtimesahead,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)ANewContractforRetirementLondon:ippr

CookeGandLawtonK(2008)WorkingOutofPoverty:Astudyofthelowpaidandtheworking

poorLondon: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,ThirdReportofSession2008-09London:TheStationeryOffice

OsborneG(2009)Wewillleadtheeconomyoutofcrisis,speechtotheConservativeParty

Conference,6October

WhiteS(2003) TheCivicMinimum:Ontherightsandobligationsofeconomiccitizenship Oxford:

OxfordUniversityPress


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AsthedebateragesaboutwhenandwheretheGovernmentspendingaxeshouldfall,otherpublicservicesmustlookontheNationalHealthServicewithenvy.Labourandthe

ConservativesbothdeclaretheyaretherealPartyoftheNHS.Toprovethepoint,each

commitstocontinuedrealtermincreasesinNHSfunding,albeitatamuchslowerratethan

recentyears.

YettothinkthattheNHSissomehowsafefromthepublicspendingsqueezewouldbe

wrong.Theageingpopulation,theincreaseinchronicandlifestyleconditionslikeheart

diseaseandobesity,risingfertilityrates(particularlyamongolderwomen)andthelikely

negativeeffectsoftherecession,especiallyforthenationsmentalhealth,willdrivemajor

increasesindemandforhealthcareintheforeseeablefuture.

Itdoesnotstopthere.Healthpricestendtorisefasterthanthoseinthewidereconomy.

Newdrugsandhealthtechnologiesaccountforanannualaverage0.5percentincreasein

theNHSbudget.NHSTrustswillalsoneedtofundthe0.5percentincreaseinemployer

NationalInsurancecontributionsfor1.3millionstafffrom2011/12ontopofthe420

millionofinflationarypressuresbuiltintotheNHSpaysystem.Asqueezeonsocialservices

budgetswillfurtherincreasepressure,sincelesssupporttokeepolderpeoplehealthyand

livingindependentlyislikelytoleadtomoreserioushealthproblemsdeveloping,fuelling

evengreaterdemandfortheNHS.

Principlesforreform

ThesepressuresmeantheNHSneedstomakeatleast20billionofsavingsoverthethree

yearsfrom2011,justtostandstill(Applebyetal2009).Politiciansneedtobehonestabout

thescaleofthischallenge.Theyalsoneedaclearsetofprinciplestoguidedecisionsabouthowtheproblemwillbeaddressed.

ThefirstprinciplemustbetomaintainthefoundingcommitmentoftheNHS:that

healthcareshouldbefreeatthepointofuse,accordingtopatientsneeds,nottheirability

topay.InternationalcomparisonsconsistentlyshowtheNHSisoneofthefairest,mostcost-

efficienthealthsystemsintheworld.

Thesecondprincipleshouldbetoprotect,andwhereverpossibleseektoimprove,services

forthoseingreatestneed.Despiteitsoverallfairness,theinversecarelawwherepatients

withthegreatesthealthneedsalsohavetheworseaccesstoservicesstillbedevilstheNHS

andmustbetackledintheyearsahead.

Third,theNHSshouldshiftitsfocustowardspreventionandearlyinterventioninordertoavoidbuildingupproblemsforthefuture.TheWanlessReport(2004)rightlyarguesthatthis

isoneofthekeystocontaininghealthcarecostsinthelongterm.

Fourth,theNHSshouldseektogivepatientsgreatersayandgreatercontrolovertheircare.

EvidencefrominitiativessuchaspersonalbudgetsandtheExpertPatientProgrammeshows

thiscanimprovepatientsoutcomesandreduceserviceuseandtheoverallcostsofcare.

Finally,reformsshouldinvolveandengagepatients,thepublicandstaff.Thiswillleadto

betterdecisionsaboutNHSservices,andmoresupportforchange.Thiscanonlybeachieved

locally:aserviceaslargeandcomplexastheNHScannotbemicro-managedinWestminster

andWhitehall.

Learningfrompastexperienceisvital(NHSConfederation2009).Astrategybasedonlettingwaitinglistsgrowwillnotsignificantlyreducecosts;itwillonlyproduceaone-offsavingand

therewillalsobesignificantadditionalcostsinvolvedinmanaginglongwaitinglists.Long

5.TheNHS Canbettercaredeliverbettervalue?

LizKendall


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waitinglistsalsounderminesupportforthefoundingprinciplesoftheNHSandbuildup

problemsforthefuturebecausepatientshealthworsensastheirtreatmentisdelayed.In

addition,better-offpatientscanjumpthequeuebypayingtogoprivate,leavingthepoorest

andmostdisadvantagedpatientstosuffer.

RestructuringtheNHSremovingregionalhealthauthoritiesormergingPrimaryCareTrustsmayseemlikeatemptingoption.Butpreviousre-organisationshaveproducedsmaller

savingsandbenefitsthanoriginallypredicted.Thecostsandopportunitycostsalsotend

tobegreater.AnyonewhohasworkedintheNHSknowsthatrestructuringtendstodistract

peoplefromtherealbusinessofreformingcare.

Somecommentatorshavecalledforco-paymentstobeintroduced,forexamplecharging

peopletovisittheirGP.Theyarguethatprescriptionchargesandpaymentsfordentistry

havebeenacceptedwithoutunderminingthefoundingprinciplesoftheNHSandthatthe

poorestcouldbeprotectedbyexcludingthemfrompaying.

Evenifthoseonlowincomesareexcluded,evidencefromothercountriessuggestsmodest

co-paymentscanbeexpensivetoadministerandhavelittleornolong-termimpactonrates

ofserviceuse.Chargesthataresethighenoughtoaffectbehavioureitherresultinpatients

accessingserviceswhentheirhealthhasworsened(therebyincreasingtreatmentcosts)or

avoidingprimaryhealthcarealtogether,turningtomoreexpensiveemergencyservices

instead.

Lessbutmoreeffectiveinspectionandregulation,furtherbackofficesavings,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.Theyoftendontknowwhichnumbertocall999,NHSDirectortheGPorwhichservicesareavailablein

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


28/79


preventedfromrequiringhelpinthefirstplacethroughbettermanagementoftheir

conditions.

Incrementalimprovementsinindividualserviceswillnotdeliverthescaleofchangerequired.

Instead,weneedaboldvisionforchangesacrossthewholesystemofemergencyand

urgentcare(AmbulanceServiceNetwork2009).Thegoalshouldbetocreateasimple,seamlesspointofaccesstothesystemwithanewthree-digitnumberforurgentcare111

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.

TheNHSnowhasthetechnologytocreatearealtimedirectoryoflocalservices,showing

whatisavailable,whereandwhen.Crucially,thistechnologymatchespatientsneedswith

theskillsofstaffineachservice.Thisnotonlymeanspatientswillgetthebestavailablecare

butthatcommissionerswillbeabletoidentifygapsinserviceprovision.Preventative

healthcarethatempowerpatientswithlong-termillnesseslikeheartdiseaseanddiabetesto

bettermanagetheirconditionwillbeakeypriorityhere.

Noneofthiswillbeeasy.Improvingservicequalityanddeliveringsavingsofthescale

requiredcannotbedonewithoutsignificantlyandpermanentlyshiftingcareoutofhospitals.

Therewillalsobebigchangesforstaff,whowillneedtoworkatdifferenttimes,indifferentwaysandindifferentplacestomeetpatientsneeds.

Butwithleadershipandfocus,andbyworkingwithcliniciansandthepublic,theNHScan

deliverbettercareforpatientsandbettervalueformoneyfortaxpayers.Itshouldseizethis

opportunitywithrelish.

AmbulanceServiceNetwork(2008)Avisionforemergencyandurgentcare:theroleofambulance

services,June,London:AmbulanceServiceNetwork

ApplebyJ,CrawfordR,EmmersonC(2009)Howcoldwillitbe?ProspectsforNHSFunding2011

2017,London:TheKingsFundandInstituteforFiscalStudies

NHSConfederation(2009)Dealingwiththedownturn:thegreatesteverleadershipchallengeforthe

NHS?TheFutureofLeadershipPaper4,June,NHSConfederation

WanlessD(2004) Securinggoodhealthforthewholepopulation:Finalreport,February,London:HM

Treasury


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31/79


3.Promotethepositive:recognisingandrewardingthethingsthatchildrenandyoung

peoplearegoodathelpsthembuildinnerresourcesresilienceandselfesteem.

4.Encourageaction: childrenandyoungpeoplearenotpassiverecipientsofservicesbut

needtoseethemselvesasactivecitizenswithrightsandresponsibilities.

5.Factorinfun: serviceswillnotbeaccessibletochildrenunlesstheyrememberwhat

childhoodisabout.

6.Recognisechildrenswiderworld: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.

Ifwefailtomakeaparadigmshiftforculturalreasonsitisjusttoodifficulttolookbeyond

individualgovernmentdepartments,electioncyclesandheadlinescallingformoremoneyto

bethrownatthesymptomsofneglectitwillbetoourshame.Thatsenseofshameisfelt

alreadybymanyinthechildrensservicessectorbecauseweknowfromseveralwell-

publicisedstudiesjusthowpoorthewell-beingofourchildrenandyoungpeopleis

comparedtothoseinotherdevelopedcountries.Infactwelagbehindonalmosteverymeasureofwell-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


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Governmentsdonotalwaysbehaveinpowerastheysaidtheywouldwhentheywereinopposition.ButwhenTonyBlairtoldtheLabourPartyConferenceinOctober1996,Askme

mythreemainprioritiesforgovernmentandItellyou:education,educationandeducation

thiswasnotjustrhetoric.SincetheelectionofNewLabourin1997,onlyhealthcanclaimto

haveprovedahigherpriorityforgovernmentbothinspendingtermsandintheattention

devotedtosystemreformthoughwhenBlairtalkedabouteducation,education,

educationitisnowclearthatwhathereallymeantwasschools,schools,schools.

Whileuniversityvice-chancellorsandheadsoffurthereducationcollegesmaycontinueto

gripeaboutallegedunder-funding,schoolheadteacherscancrediblymakenosuchclaims.

Ministersarejustifiablyproudoftheprioritytheyhaveaffordedtoschoolsspendingsince

1997,becausetheyhavehonouredthepledgestheymadeandtheyhavethefiguresto

proveit.

Owingtothecommitmenttomatchtheoutgoinggovernmentsspendingplansinthefirst

twoyearsofoffice,itwasnotuntil1999/2000thatschoolsspendingunderBlairand

Brownstartedtotakeoff.WhentheConservativesleftoffice,overallrevenueexpenditurein

primaryandsecondaryschoolstotalled13.9billion.Butby2007/08,ithadincreasedby56

percentinrealterms,to28.9billion.Thesefiguresrelatetolocalauthoritymaintained

schoolsonly.Whengovernment-fundedacademiesandcitytechnologycollegesare

included,theincreaseisevengreater.Andbecausepupilnumbersfelloverthesameperiod,

intermsoffundingperpupilthegrowthinspendingequatestoa65percentincreasein

realterms.

TheGovernmenthasbeensimilarlygenerouswithitscapitalfundingallocations.The

BuildingSchoolsfortheFuture programme,launchedinFebruary2004,isthelargestand

mostambitiousschemeofitskindanywhereintheworld.Itwasallocated9.3billionover

thethreeyears2008/09to2010/11inthelastComprehensiveSpendingReviewandthe

aimistoseeeveryoneofthe3,500statesecondaryschoolsinEnglandrebuiltorremodelled

overthelifetimeoftheprogramme.

Hastheextramoneybeenwellspent?

Someofitundoubtedlyhas.Educationalattainmenthasrisen.Legitimatereservationsmay

beexpressedinrespectofthisclaimarising,forexample,fromconcernsaboutexamination

standardsorfromacloserlookatinequalitiesinattainmentlevels.Butthefactremainsthat

the67percentof16yearoldswhoachievedtheequivalentoffiveormoreA*toCgrades

inGCSEexaminationsin2009comfortablyexceededtheGovernmentstargetof60percent.

So,aswiththehealthservice,theissueisnotwhethertheperformanceofschoolshas

improvedduringtheBlairandBrownyears,butwhetherthelevelofimprovementhasbeen

commensuratewiththescaleoftheadditionalfundingthathashelpedtomakethe

improvementpossible.

Thisquestionisespeciallypertinenttoafutureinwhichpublicfinancesarebeingsqueezed

forallotherservices.Becauseifthesameimprovementcouldhavebeenachievedwithless

money,itfollowsthatitmustbepossibletoreducefundingwithoutdamagingthe

attainmentprospectsforfuturestudents.Anddependingonthescaleofanysuchreduction,

attainmentlevelscouldcontinuetoimprove.Inotherwords,ifschoolshavenotbeen

managingtheirfinanceswellintherecentpast,whateverpartyiselectedafterthenext

generalelectionitcouldcontinuetogiveprioritytoeducationwhilerealisticallyexpecting

headteachersandeducationauthoritiestodelivermoreforless.

7.SchoolsOff-limitsforcutsornot?

SteveBundred


33/

Documents

Opportunities in an Age of Austerity: Smart ways of dealing with the UK’s fiscal deficit