On the face of it, the budget was a quiet one for the public sector. The chancellor was clear that he was broadly going to stick to his spending plans for next year, 2010/11. As expected, there was no appetite to tighten spending in the weeks before an election.
But there were already severe spending pressures implicit in the spending plans announced in the Pre-Budget Report of December 2009. While those plans see current spending increasing by an average of 0.8% per annum over the three years until 2013/14, the inevitable increase in spending on debt interest and (to a lesser degree) benefits means that everyday spending on services may decrease overall by around 8% in real terms cumulatively over that three-year period.
As the government has said that spending on schools, health and international development will be protected, that means other areas, such as defence and transport, will have to be cut by around 15% in real terms cumulatively over the same period.
The £11bn of efficiency savings and £4bn of savings from curbs on public sector pay and pensions will not do the trick on their own. As the chancellor acknowledged, some programmes will have to be cut. What we do not yet know is exactly where those cuts will fall.
Nor is that the end of the story. PwC’s analysis suggests that, despite the rosier fiscal forecasts given by the chancellor, there will need to be a further fiscal tightening of around £30bn over the period up to 2015/16 in order to eliminate the structural current budget deficit in a timescale which the international capital markets will demand. That tightening could take the form of higher tax, further spending cuts, or a mixture of the two. However, as tax proceeds are already at or around the long-term trend level of 38% of GDP, the odds have to be on further tightening of spending.
An intriguing alternative to further tax rises would be a more determined effort to raise revenue by charging for services provided by the public sector. There are, of course, plenty of services which already have their costs covered at least in part by charges: prescription charges, tuition fees and entrance charges for leisure facilities come to my mind.
However, the revenue raised by charges in the UK is significantly lower than that in other non-European OECD countries, to the tune of almost 2% of GDP - interestingly, the same amount by which we believe the fiscal stance will need to be further tightened. Charging is not a panacea, and may well be inappropriate for some services and some users. Given the fiscal challenges, however, it would certainly make sense for public sector leaders to examine this option afresh.
What difference will the outcome of the election make? Very little, probably. Any government, of whatever colour, will have the same fiscal challenges to deal with. The debate about whether there should be additional spending cuts in the next financial year (i.e. from next month onwards) is more political than real. In practice, it would be difficult to make significant changes to spending plans at such short notice.
The main point for public sector leaders to take away is that the long-awaited public sector recession is finally about to start. Anyone who does not yet have plans in place to cope with major spending cuts needs to make them now.
Jon Sibson is head of government and public sector at PricewaterhouseCoopers
