There is no doubt, as the chancellor stated in his Callaghan Lecture earlier today, that there is a need to make tough choices. Government has a responsibility to plan now to put the public finances back on a sustainable basis in the medium term. But with a rising tide of public sector debt, and a major budget deficit to close, the question is – how can the fiscal gap be bridged?
There is no easy route to this objective – all of the tax and spending options for closing this scale of fiscal gap involve painful choices. For instance, it is almost inevitable that there will be a need for rises in major revenue raisers such as income tax, national insurance and VAT, yet consideration needs to be given to the regressive impact of some of these taxes for the poorest in society. We also expect that a more radical re-shaping of the public sector cost base will be needed than is currently envisaged – but can this be done without damaging frontline public services?
Efficiency improvements will be necessary but these have long been on the agenda and will not be sufficient on their own to fill the fiscal gap. There is a need to revisit the role of government and put all options on the table, including stopping some activity and prioritising some areas over others. Nothing should be off the agenda.
Turning the tide of debt by taking tough decisions on both tax and spending will be critical to restoring the public finances to health. Failing to fix the fiscal problem, by contrast, would be a recipe for persistently high interest rates, a more volatile currency and a less certain environment for business investment, employment and growth. Sustainable solutions require political will and ownership at the highest level - doing nothing is not an option.
Jon Sibson is government and public sector leader at PricewaterhouseCoopers LLP
