As George Osborne contemplates his third Autumn Statement, he knows that the stakes are high – both for the UK economy and his personal legacy as chancellor. His Plan A for the economy – to eliminate the structural deficit by cutting public spending and boosting growth – has been a dismal failure. But changing course now would seriously weaken the credibility of the coalition government.
Osborne has been forced to make a number of U-turns following his disastrous Budget in March. He has also had to take urgent action to make things happen, introducing a Funding for Lending scheme along with fast-track legislation to boost infrastructure projects and liberalise the planning system. Prime Minister David Cameron has similarly promised an end to ‘dithering’ and announced his first Cabinet reshuffle. But will it all be too little, too late?
There are real signs of nervousness in high circles about the UK economy. Second-quarter gross domestic growth figures, though revised up to –0.5%, were still hugely disappointing. The Bank of England has downgraded its growth forecasts and the International Monetary Fund is having second thoughts about current policies. Meanwhile, the City is worried that government -borrowing has gone up, not down.
Perhaps most critically, the Liberal Democrats are beginning to think about alternative economic policies – although agreement on the current strategy is the glue holding the coalition together.
The continuous optimism of the past few years that recovery is imminent is fading. At each stage, predictions are made for decent economic growth and elimination of the budget deficit but these events keep getting pushed further and further into the future.
Rumours abound that Osborne will abandon one of his key fiscal rules when he makes the Autumn Statement on December 5. His commitment to ‘see public sector net debt falling as a share of GDP in 2015/16’ now looks unachievable. He could, of course, announce more tax rises and spending cuts but that runs the risk of choking off any potential recovery.
Cabinet secretary Sir Jeremy -Heywood has already suggested that the public sector is only halfway through the reductions needed to achieve the deficit target. Cameron has said that austerity will continue until 2020, yet hitherto neither he nor Osborne has proposed any major policy change. They wait, like Mr Micawber, for ‘something to turn up’, while many long-term issues, such as climate change and the ageing population, remain unaddressed.
It will be these long ‘slow burn’ issues that will become the future serious challenge, swamping anything seen so far. But the weak response to the Dilnot commission on social care funding and the Treasury’s reluctance to subscribe to the green agenda suggest these long-term issues are not being -seriously considered.
The orthodox response to the current downturn is the wrong response, and will simply exacerbate a bad situation. If we stick to Plan A then low growth or no growth are the prospects for the foreseeable future. Yet if the government were to adopt more Keynesian policies, the -experience of Japan suggests that it could still be a long time before we saw -significant recovery.
These dismal prospects do not inspire confidence and hope for the future. Not surprisingly, people and businesses are being very cautious, choosing not to spend, thus creating further downward pressure in the economy. The ongoing cuts in public spending are creating huge uncertainty and fear among the millions who work in public services, whether or not they are directly affected. This lowers confidence even further.
In our book Public services and financial austerity, we criticised the coalition government for its lack of vision and failure to articulate clearly what kind of country we could expect to be living in at the end of this period of austerity.
The IMF clearly thinks that a ‘Plan B’ is needed if the economy does not grow soon. We suggest that Plan B should contain actions to address both short- and long-term issues, structured in three themes: political and governance; economic and financial; and social. These proposals do not assume an early return to growth. We anticipate that post-austerity Britain will not be ‘business as usual’.
Political and Governance
1. Make government accounts honest
Government accounting in the UK and many other countries does not meet the standard of ‘representing fairly’ the state of the public sector. It is neither open nor transparent.
Major changes need to be made so that the immediate and long-term -implications of policy decisions are clear from the face of the accounts and are not disguised as notes or ‘reversed out’ calculations that reduce cash figures and hide the tax r-evenues required.
Recent CIPFA initiatives in this area are critical towards making an improvement. Much has already been done, but much remains to be done. Unless we do this, we just won’t know the truth of what is happening.
2. Devolve and localise
By international standards, the UK is an incredibly centralised state but all UK governments, over many years, have largely paid lip service to localism to sustain local support.
After an initial period of enhanced -localism, the current coalition government is now slipping back into traditional central control models. To meet the challenges we now face there is an urgent need for substantial devolution of power to the regional and local levels.
Shifting budgets and control down to a local level allows for locally sensitive tax decisions to be taken to meet real community needs and recognises that locally determined variations in service standards need not be negatively portrayed as a ‘postcode lottery’. This is the Big Society idea taken at its true value.
Furthermore, an over-centralised state is not only inimical to innovation, but is inherently inefficient. Mobilising local communities might not be easy or -immediate, but if properly supported, can be effective.
Economic and Financial
3. Tackle the big debts
This does not mean solely -government debt. Although the debt is now as high as it was at the end of the Second World War – around 600% of GDP – more than half of it is owed by banks and financial institutions.
That represents a greater risk to future wellbeing than household debt, business debts, or public debt.
Banks are an essential part of the -monetary economy, but where their activities are larger, wider and unrelated to the real economy, then there are problems. So separation of ‘real economy banking’ from the ‘casino banking’ of the so-called investment banks is essential.
In addition, the use of derivatives that are unrelated to the real economy need to be heavily restricted or banned altogether. The Western-style capitalist economy depends critically on a cycle of debt and growth to function. If we are to learn to live with a ‘no growth’ economy then we have to have different arrangements – much more akin to local savings and loans arrangements backed by assets, or Islamic-style banking.
4. Seriously go green
The recession needs to be tackled by using government spending to put back into the economy what is being taken out as a result of debt reduction strategies by households, businesses and banks. But the aim should be to develop a green economy, with investments in renewable energy, efficient infrastructure and long-term sustainability.
Spare capacity should be used wherever possible and wherever it is found. The development of a green economy would also put UK businesses in pole position to bid for contracts for green technology in the emerging economies.
5. Boost manufacturing
The idea that a service-based -economy could ever be enough is misplaced. Our dependence on financial services – currently 18% of GDP – is too high, too concentrated in London and too vulnerable to being shipped elsewhere, as bankers regularly threaten to do. The UK has world-class manufacturing but only in a few areas.
We must build on expertise in engineering and technology and encourage manufacturing and innovative developments through research & development, protection of nascent industries and strong support for innovation.
6. Reduce inequalities
Evidence from other countries, most notably Canada and Sweden, shows that fiscal consolidations work only if people see them as fair, with all parts of the community sharing the pain.
In the UK, this is most definitely not the case. While attacking bankers’ bonuses is good political rhetoric, other approaches are needed. First, tax and wage policies should aim to reverse the widening gap between rich and poor that came about from the deregulated -globalised economy of the past 30 years.
Doing so would meet people’s long-term aspirations for fairness and make a claim of ‘we’re all in this together’ more realistic. It would also reduce social alienation and pressure on public services growth from the welfare budget.
Secondly, the imbalance between regional economies needs to be addressed. The overheated economy of London and the Southeast contrasts with the underperforming economies of the North and West, with their higher dependence on public services and welfare benefits. Redressing this can be achieved through a credible cities policy that recognises that cities are points of growth and innovation – and that -policies that concentrate only on the capital city are going to be ineffective.
This requires a serious emphasis on regional economic development and the re-introduction of some form of regional development infrastructure. Informal arrangements and partnerships are just not up to the job.
Thirdly, it must be recognised that real growth in living standards can come about only by having a more even distribution of wealth and income internationally.
7. Address the issue of old age
National Insurance began as a social insurance scheme to guard against economic uncertainty caused by unemployment or ill-health, and to give some guarantee of income at the end of a working life. Its aim is to provide financial security that encourages people to train, adapt and innovate. However, it got swept up into general taxation under a government promise ‘to see everyone right’ in return for their contributions, rather than being a funded social welfare scheme.
Now that the old-age element of -welfare is well out of hand with increasing longevity, there needs to be a return to a funded social insurance scheme that includes provision for social care in old age, funded by higher contributions.
However, doing this – as with all pension-type arrangements – is a long-term policy that needs consistent application. In the short term we face an immediate crisis of funding that can be met only by a combination of factors. One is to increase the level of public funding paid for from taxation. The other is to recognise that the ‘baby boom’ generation has taken 20% more out of the system than it has put in – and therefore needs to fund some of its care from accumulated assets.
8. Reform public services properly
Many UK public services need radical reform. In some cases, they are seriously underperforming. UK schools, for example, are well down the international league of countries in the Organisation for Economic Co-operation & Development. In other cases such as health, existing services just cannot cope with the growth in service demand caused by ageing populations in an environment of financial austerity.
For many decades, governments of all parties have made numerous attempts at public service reform with only a patchy record of success. The -pressures of -financial austerity mean that -governments now need to get serious about this and consider issues that have previously been seen as no-go areas. Pretending that reductions in public spending can be alleviated by improved ‘efficiency’ just won’t wash and radical and urgent actions are needed.
First, consideration needs to be given to those areas of activity where government could completely withdraw. These could include some leisure, culture and advisory services.
Secondly, frameworks are needed to encourage innovation and improved efficiency at the local level. Total Place should be reconsidered and given greater focus. It cannot be emphasised too strongly that governments that try to reform public services by centralised directives issued from offices in Whitehall will undoubtedly fail.
As former US President Harry Truman said of his successor, General Eisenhower: ‘Poor Ike. He will find that government isn’t like the army. He will give orders from the Oval Office and find that nothing happens.’
Thirdly, we need to consider public service funding methods and be open minded about alternatives such as user charges and insurance methods.
Lastly, reform of the civil service is essential since this underpins everything that has already been referred to. There are serious flaws in the current civil service model that require real reform and modernisation, not just tinkering.
There are no short-term fixes in all of this, and it takes considerable courage to set out on such a path. Would any politician do it? As Franklin D Roosevelt said in his 1933 inaugural address: ‘The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.’
He then went on to launch the New Deal and the Glass-Steagall Act to regulate the financial system. Many of his Republican supporters felt that he had betrayed them and their liberal economic values, but history records that he was a great president who gave hope back to the American people. It is a mighty precedent for politicians who are brave enough to follow it.
Malcolm Prowle and Roger Latham are respectively professor and visiting fellow at Nottingham Business School. Their book, Public services and financial austerity: getting out of the hole, is published by Palgrave Macmillan. This feature first appeared in the October issue of Public Finance