Fixing the fiscal hole

13 Nov 12
Ben Lucas and Henry Kippin

The government is facing a larger-than-forecast black hole in the public finances. Securing future fiscal sustainability and ongoing economic growth will demand some radical new approaches to policy making and service delivery

The gap in the UK’s public finances is larger than we had anticipated. A new report written by the 2020 Public Services Hub at the RSA and the Social Market Foundation this month looks at the scale of the challenge for public finances ahead of this year’s Autumn Statement. The analysis, based on updated figures from the Office for Budget Responsibility, finds that an additional £48bn of tax rises or spending cuts will need to be made by 2017/18 if the coalition government is to meet its aim of eliminating the structural deficit within five years.

The figures are grim, with frightening implications for public service provision. The SMF estimates that if health, education and international development continue to be protected, cuts of 23% will be needed across remaining government departments – on top of the already substantial cuts that were already planned by 2014/15. To put this is in perspective, this is equivalent of cutting half of the Department for Work and Pensions’ total spending on JobCentre Plus and employment programmes.

Yet even with a return to economic growth, the UK’s ageing population and rising demand for public services will continue to pile huge pressures on service provision and the public purse. As Lord Michael Bichard argued at the report’s launch, there is a ‘gaping hole’ in the current public service model which continued cuts to welfare spending and departmental budgets simply cannot fix.

What we do about this is not a short-term issue. The bigger and longer-term challenge facing the UK is how to create a joined up strategy to ensure fiscal sustainability, ongoing growth and public service reform. At present these agendas are being tackled separately, with strategies often at odds with one another. Yet the big challenges of the future – responding to growing and changing demand, improving inadequate and unequal social outcomes, and creating inclusive growth and prosperity – are not only complex and multi-layered but fundamentally interrelated. Tackling them requires a joined-up and coherent approach that cuts across traditional service divides, geographical boundaries and the historical relationship between citizen and services.

At the outset, we need a frank discussion between policymakers and the public about how we make policy, how we deliver it, and what we measure and value in public services. None of the political parties at the last election were open about the scale of the fiscal challenge we face, or the stark policy choices that need to be made. But this conversation is not helped by a centrally-focused spending review.

Second, we need to build on City Deals and Total Place to intelligently devolve power from Whitehall to localities and seriously explore of the possibility of multi-polar growth. There is a need to fundamentally rebalance revenue-raising and expenditure in particular towards local government and for greater collaboration and integration, enabling smart cities to compete internationally. As Lord Bichard and Ben Lucas both argued at the report launch, central government must give local government the capability to focus on issues such as inequality and economic stagnation which centrally set policies do not effectively address.

We should also be focusing much more strongly on the potential of partnerships between citizens, service providers and local government among others to shape public services and manage demand for them. Public services should respond to local need; and services that strengthen the self-help capacity of citizens also help to reduce that need in the medium to longer term.

Crucially, we should be assessing and valuing services based on their social productivity and the social and economic value that services create. We should also be more transparent about how citizens themselves contribute to, and benefit from, public services.

As the fiscal outlook worsens and our policy options narrow, it is vital that we explore these issues. While these steps do not represent a silver bullet to fix our fiscal problems, we must take this opportunity to engage citizens and practitioners in open dialogue about the challenge we face as a society. Now would be a good time to start.

Ben Lucas is principal partner and Henry Kippin is associate partner at the RSA's 2020 Public Services Hub

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