Beyond austerity: the bad news

10 Jul 13

Austerity might hurt but it’s not the only problem facing the public sector. Radical solutions will be needed to drive down costs in the years to come

Some people in the public sector think they need to hunker down during these years of austerity and life will eventually return to normal. They know austerity is a challenging time – with hundreds of thousands of public sector jobs in jeopardy – but they are looking forward to when it has passed and those still with jobs can return to the good old days.

I have bad news for those people – and not just because deficit reduction is likely to last another five to seven years. The bad news is that austerity is not the only or even the biggest pressure that public sectors in advanced economies are likely to face for a long time.

The public sector is caught between two long-term trends that mean the search for efficiencies and new models of service provision will not only have to continue but accelerate for the foreseeable future. On one side of the long-term pincer movement is the rise in the cost of caring for developed nations’ ageing populations. On the other side is the decline in the vitality of economies.

Half of state expenditure is already spent on pensions and health care with the rise in health care bills reflecting the increased cost of treating elderly people. In the years ahead the pressure on all other public services – schools, policing, defence, local government – is going to become even more intense as the health and pensions budgets hungrily demand a bigger share of the nation’s resources.

At the same time those resources – the other side of the pincer movement – might not grow at the rate they once did. Even before the great credit crunch, the wages of many lower skilled workers were declining. They were declining for many reasons but the main ones included global competition and immigration. Today’s world is one where prosperity is being extended at a dramatic and liberating rate. Hundreds of millions of poorer people, notably in Asia and now in Africa, are becoming consumers and enjoying self-sufficiency. In this context we need to become a different kind of economy or we won’t enjoy the same levels of growth (and tax revenues) that we’ve had in the past.

The global economy is not the only reason why we won’t simply be able to tax our way out of the public sector’s overall predicament. There is a case for rebalancing our tax system – away from income to property, for example, and away from taxing good things like families to bad things like pollution. But it’s going to be hard to extract much extra tax from either business or workers. If economies are taxed much more than 36% to 40% of gross domestic product for any length of time, they become uncompetitive and slip down global league tables. Britain is probably at its taxable limits or even beyond them.

In this context we are going to need much more far-reaching and ongoing changes to the way our public services are designed, staffed and financed.

More competition in the provision of public services and for users of public services should drive down costs, as it does in almost every walk of life. We should welcome profit-making companies into the management of schools, prisons and policing if they can maintain standards at lower cost.

Lower costs will involve lower wages for many people working in the public sector but, more importantly, it should also mean much higher rewards for the best head teachers, the most effective medical centres and the best run courts.

Finally, there is financing. Some public services will almost inevitably move to models of co-payment. We already have paid prescriptions in the NHS and some toll roads. We should expect more such mechanisms if accident and emergency and other public services are to be used with restraint and responsibility.

Austerity might not last but other challenges will. Britain’s public sector needs to be ready for permanent revolution.

  • Tim Montgomerie

    Comment editor of the Times and former editor of the ConservativeHome website.

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