‘Fiscal stimulus’ will be at the cost of public services

26 Nov 08
The chancellor’s PBR plans will be paid for by cutting public spending rather than tax and NI changes

27 November 2008

By Tash Shifrin Public sector organisations and experts have warned that services will face severe cuts to pay for the record levels of government borrowing set out in Chancellor Alistair Darling’s Pre-Budget Report. The PBR centred on Darling’s £20bn ‘fiscal stimulus’ package, aimed at shoring up the economy, and his plans to reduce borrowing from a projected record level of £118bn in 2009/10 when the economy recovers. Darling’s plans for restoring the public finances will rely on a spending squeeze, which the Institute for Fiscal Studies said would contribute around £19bn to the Treasury coffers in 2012, compared with just £4bn from deferred tax and national insurance rises.  The PBR set out a requirement for public services to produce an extra £5bn in efficiency savings, on top of the £30bn already planned for the three years to 2010/11. A new round of efficiency savings – to be detailed in the Budget – will then be required for the next Spending Review period. But the biggest hit will come from reduced spending growth for the three years from 2011/12, cut back from 1.9% a year in the 2008 Budget to just 1.1% in the PBR – a reduction of £37bn in today’s money. Capital investment will be reduced by £14bn over the same period, in addition to the £3bn worth of projects brought forward in the PBR. Colin Talbot, professor of public policy and management at Manchester Business School, said: ‘Assuming the government continues to try to put more money into the NHS and health, I suspect that’s going to mean a real-terms decrease in other departments over the three years.’ The current £30bn efficiency target was ‘already incredibly ambitious’, he said. Raising this to £35bn would create ‘enormous pressure’ on the public sector. Alan Downey, UK head of public services at KPMG, said it was ‘safe to presume’ that local government, the Department for Work and Pensions, Revenue and Customs and the Foreign Office would be ‘heavily affected’. But he added: ‘The “sacred” areas of education and health might suffer as well.’ The Local Government Association urged that new efficiency targets should be ‘weighted towards other parts of the public sector’, arguing that councils were already making more than their fair share of savings. A spokesman said services were under pressure because the current three-year settlement was the tightest for a decade. The PBR announcements made the picture ‘even bleaker’. Local authorities faced a bill of ‘about £130m a year’ for increased national insurance contributions alone, he said. ‘There are only so many efficiency savings you can make. There is only so long you can improve back-office services before you have to cut frontline services.’ NHS Confederation policy director Nigel Edwards said the spending squeeze was ‘an anxiety’ and that the health service must ‘get a grip now’ on quality and efficiency. He warned that plans to use the NHS’s World Class Commissioning programme to drive efficiency could hit more vulnerable services.  ‘Previous experience suggests that efficiency savings can easily turn into cuts, particularly for services not on the [acute hospitals] tariff,’ Edwards said. He also questioned how some of the PBR measures could be implemented. The chancellor’s report said better use of the NHS estate would ‘reduce the need for hospital space by up to £3bn’ and save up to £100m a year in costs. But Edwards told Public Finance: ‘No-one’s quite sure where the £3bn of hospital space we don’t need is, how operational this is in foundation trusts [which are largely autonomous from central government] or how it will release £100m savings.’ The PBR announcement on November 24 unblocked a logjam of financial and planning guidance. It was followed on November 26 by local government minister John Healey’s announcement confirming councils’ spending allocations for 2009/10 and 2010/11. Local authorities will receive £73.1bn in 2009/10 and £76.4bn in 2010/11 – increases of 4.2% and 4.4%. Healey said local government was expected to make the same 3% annual efficiency improvements as the rest of the public sector. But he called for councils to go further and find more than £1.5bn new savings every year. The NHS operating framework and much-delayed new allocations formula are now expected in mid-December, with the new tariff to follow in the new year. But although the release of guidance should make planning easier for public sector organisations in the short term, IFS director Robert Chote warned that the outlook for the public finances could worsen ‘if the recession is longer or deeper than expected’ or if Treasury assumptions about the size of a structural hole in the public finances proved wrong. A ‘permanent £60bn hole’ in the economy was the main reason for the PBR’s projections of rising debt for six years, Chote said. There was ‘uncertainty over the estimate of the permanent loss’ to the economy caused by the credit crunch and financial crisis, which the Treasury put at 4% of gross domestic product, he warned.


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