Although there are signs that the recession might be easing, it has taken a heavy toll on the UK’s public finances, with a structural budget deficit of around 10% of gross domestic product expected this year. Higher public borrowing is unavoidable in the short term, but government has a responsibility to plan now to put the public finances back on a sustainable footing in the medium term.
Estimates from PricewaterhouseCoopers suggest that the government will have to close a fiscal gap of around 3% of GDP by 2015/16, equivalent to £43bn at today’s prices. The 2009 Budget set this target for 2017/18 but the government should not wait this long.
To put us on track to achieve the 2015/16 target, the government should aim for additional fiscal tightening of around 1.8% of GDP by 2013/14, which is equivalent to around £26bn at today’s values, over and above plans in the Budget. This is desirable both to mitigate the risk of higher interest rates on UK public debt and to provide a buffer against the cost of future recessions. This is likely to be achieved by a mixture of tax rises and public spending restraint.
Our analysis of the potential costs of ageing also reinforces the case for fiscal consolidation to occur earlier and faster than the Treasury’s Budget projections. This would establish a stronger base position of current budget balance in 2015/16, from which a judgement could be then made as to what further fiscal tightening would be appropriate over the following few years to provide for the longer-term fiscal costs of an ageing population.
There are three areas where tough decisions will have to be made to reduce public spending: the use of fewer resources for services that will continue to be provided in the same way, by implementing pure efficiency measures; considering how best to achieve outcomes and look for smarter ways to achieve them, including determining who is best placed to deliver them; and prioritisation of some services, with others being discontinued or left to the private and/or third sector to provide.
On any credible fiscal scenario there will be a need for spending restraint. Politicians are being forced to debate this stark reality and officials are now considering the implications of a public sector recession. The challenge is to cut spending without damaging frontline services, particularly to the most vulnerable sections of society at a time of recession and increasing need. The call to do more with less reverberates across Whitehall, devolved administrations and local councils, but how to achieve this goal is far less clear.
There are many opportunities for spending cuts. Indeed, we estimated that it could be feasible to achieve savings of around £28bn per annum by 2015/16, and around £11bn per annum by 2013/14, additional to those included in the Budget 2009 plans.
Improved efficiency is necessary but not sufficient. There is a need to revisit the role of government and consider all options, including stopping activity, no matter how well intentioned, and decommissioning services where they are no longer needed. Such decisions should, however, be made in a rational way, based on hard evidence.
Irrespective of who wins the next general election, turning the tide of debt through a prioritised approach to taxation and spending will be critical to steering the economy back to sustainable growth in the longer term. Failing to fix the public finances, by contrast, would risk persistently high interest rates, a more volatile currency and a less certain environment for business.
Jon Sibson is government and public sector leader at PricewaterhouseCoopers LLP. This blog is based on the PwC report Dealing with (even more) debt – Big decisions, tough choices
