Failure to plan for the long-term harms national interests. But a looming election encourages politicians to defer hard decisions on tax, pensions and health
I recently heard about a senior journalist who, stepping into a new role analysing Westminster politics, said they had no time for the usual political gossip. While many colleagues might still be obsessed with the comings and goings of politics, there was just too much real news to bother with the usual game of who is in or out of favour.
Any survey of the papers or news websites shows that there is indeed a lot going on in the world. From Ebola and Isis to the Scottish independence question or the conflict in Ukraine, this summer has been a busy time for 'proper' news and, with the last party conference season before the general election underway, it seems unlikely the pace will slow down.
Yet what strikes me, and indeed many in the finance profession, is that amid all this there is a lot going on that is not being reported. The lack of coverage of certain issues tells us less about the media and more about the choices that political leaders make and what they talk about to voters and reporters.
Take, for example, the long-term demographic, economic and fiscal prospects of the UK and the resulting challenges for the public services. I believe that this is the most significant issue the UK faces and it is telling that it is not being addressed in any meaningful way by politicians in the UK as a whole or its constituent governments and parties. An incongruous debate between now and May 2015 will be characterised by both specific populist ‘giveaways’ and the vague resolve of further fiscal restraint. It’s more jam today and a promise of fair rations tomorrow.
As things stand, tax yield is falling as a share of GDP without a transparent discussion by the main parties about how this is fuelling the need for further public spending cuts. Relatively flat spending on health means that its share of GDP will fall by 2% by 2020, even though this is clearly not deliverable and the next government will be forced to put in more money. Social care and health integration is stalled with both the health and local government sectors under pressure.
Intergenerational inequality means that the 'older wealthy’ are being subsidised by the economically active, who, in the absence of a sustainable funding model for long-term care, are paying for the state.
Whatever the academic or governance benefits of academies and free schools, in England we are often creating school places where they are not most needed and so afford poor value for money.
This lack of realism in political discourse is deeply regrettable. In our frenetic short-term system of policy announcements, claims and counter-claims, none of the parties has made any meaningful attempt to set out how they will deal with the Gordian knot of unaffordable pensions, rising health and social care costs, and eliminating the deficit.
This creates a real risk that, while voters expect business as usual the other side of May 2015, the absence of sustainable planned solutions will mean that public financial management becomes prone to shocks and crisis management. We have more than half of the coalition's budget cuts still to come, while the unintended consequences of the over 40% that have already been made are yet to fully emerge.
An example of short-termism is the triple lock on pensions, introduced in 2010. It means that no matter what the state of the real economy, or the public finances, pensioners will continue to see above-inflation increases. All the parties know the fiscal challenges the country faces and, in persisting with the triple lock, they are trading short-term electoral success for the long-term affordability and containment of Annually Managed Expenditure – the half of the exchequer that budget holders cannot easily control. If you look beyond the election you see the point of the old joke that AME 'is neither managed nor annual'. With the controllable half of budgets, called Departmental Expenditure Limits, due to fall yet further, AME is set to continue to grow both in size and in the proportion of public spending, not least on debt repayment when rates rise.
The government proposes to cap AME by constraining non-pensioner welfare benefits if required. But this demonstrates the nub of the problem. Our national accounts do not plan future expenditure with the same precision that they report past expenditure. The cap may be deliverable but, given scant information and in the absence of 'accounts quality' plans to deal with AME pressures, CIPFA scores the next government’s finances as high risk.
As we see the party manifestos emerging, we will continue to apply rigorous tests to each of them, because we think a failure to plan for the long-term is harming national interests. Put bluntly, the parties and the next government must give sound 'accounts quality' plans and move away from the vague 'economic estimates' of their fiscal measures.
The debate on the Scottish independence referendum has raised important questions about the democratic deficit of our UK-wide system of governance. I am not convinced that our parties have as yet understood 'the English problem' –where Westminster feels as remote to parts of England as it does to many Scots. An English parliament will not be enough to meet regions’ concerns that government in England is too centralised in London.
Beyond the referendum outcome, CIPFA argues that substantial reforms are needed to ensure that through greater transparency and higher quality financial planning, we refocus on difficult public financial management decisions. These include conerning taxes, inter-generational equity and spending options; the present balance between public spending by government and the personal responsibility of citizens is not affordable in the long term.
Too many significant issues such as tax, pensions and health are being deferred for political expediency. This is destabilising many public services. Some areas, such as English local government or defence, are being cut significantly – but without addressing issues that raise questions about the next government’s ability to balance the books. In my view, with over half of the fiscal consolidation still to be made, the present debate on the public finances is hollow. It avoids issues and tough choices we all know need addressing.
Rob Whiteman is the chief executive of CIPFA
The opinion piece was first published in the October edition of Public Finance magazine
