Whitehall's warning of woe

6 Mar 09
PETER RIDDELL | The media is full of gloomy stories about budget cutbacks and redundancies as the economy worsens.

The media is full of gloomy stories about budget cutbacks and redundancies as the economy worsens.

But the crunch period is not going to be now, or even over the next few months, but most likely in over a year’s time after the next general election.

For the past six months, there has been a crisis mood in Whitehall, not only as the Treasury has readjusted to stabilise the banking system but also as departments have concentrated their efforts on mitigating the effects of the recession.

The National Economic Council has emerged as the main forum and clearing house for co-ordinating non-budgetary and non-banking measures such as cutting housing repossessions, aiding small businesses and helping unemployed people through new skills training. Even the previously sceptical Treasury has been won round to the advantages of the council.

But such recession fire-fighting — and Prime Minister Gordon Brown’s focus on his summit of G20 world leaders at the start of next month — is only part of the story. Increasingly over the past couple of weeks, senior civil servants have started to warn colleagues that this is not just going to be a one- or two-year adjustment, a nasty but relatively brief shock. The word from the top levels of Whitehall is, rather, that the pain could last until the middle of the next decade.

This assessment has profound and still largely under-appreciated implications. Even though economic recovery will help to reduce borrowing, the lasting gap in the public finances left by the contraction of the City and financial services will mean a fiscal adjustment running into tens of billions of pounds.

But it not just the numbers that are horrendous: the politics are dire as well. Six years covers not only the whole of the next Parliament but also two Comprehensive Spending Reviews. This means that the next government, of whichever party, is going to have to concentrate, until the general election after next, on recovery rather than on ambitious new programmes.

So, until 2015, and possibly later, the tax burden is likely to have to rise and the increase in public spending is going to be much slower than the underlying, long-term rate of economic growth, and much lower than it has been since the mid-1990s. That goes well beyond belt-tightening, and will mean a radical change in both expectations and behaviour.

There are parallels with the scale of adjustment in the early 1980s under the first Thatcher government.

Contrary to the caricature of civil servants tenaciously defending the status quo, I sense both a recognition that tough action will have to be taken and a willingness to think radically. Cabinet secretary Sir Gus O’Donnell’s recent speech to the Royal Society of Arts about how the civil service is working harder than ever in response to the challenges of the recession had both a short- and long-term message.

In the short term, O’Donnell wanted to show how the civil service is handling the immediate crisis. But there was also a clear long-term message: that civil servants were ready, flexible and prepared to be innovative.

They will need to be. In many ways, civil servants might be ahead of the politicians, at least in what they are prepared to say publicly. The government is still focusing on defending increased public spending as the means of tackling the recession, while the Conservatives are concentrating on warning about soaring levels of public debt.

Neither party has said what they would do over the medium term. Any discussion about the post-recession outlook by Chancellor Alistair Darling in his April 22 Budget is likely to be general rather than specific.

Similarly, one reason why the Tories, and especially shadow chancellor George Osborne, have been subdued recently is their realisation of the magnitude of the task they will face if or when they form the next government. It is not very attractive for any politician to be the messenger of change when all you have to offer is austerity.

From the Whitehall point of view, the main aim over what is likely to be a long, and depressing, 12 to 15 months before the general election is to prevent too much damage: to limit any short-term spending decisions by the present government that will have costly and damaging long-term consequences, and to discourage the opposition parties from ruling out any options which they might later regret.

If the Tories win the next election, they will have to consider a wide range of tax and spending options — many of which will be highly unpopular with their core supporters — if they are going to get the public finances back on a better footing.

The gloom now in Whitehall is not just because no-one knows what is going to happen in the short term, or how to handle it, but also because senior civil servants recognise how severe, and long lasting, the adjustment is going to be.

Peter Riddell is chief political commentator of The Times and senior fellow of the Institute for Government

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