Uncomfortable truths

5 Nov 14

What does CIPFA want from the political parties come May 2015? Some honesty about the fiscal position, for starters – and realism about the hard choices to be made

Ballot posting

 

To hear people talk at the party conferences, at which CIPFA has been running lively fringe meetings on devolution and growth, many assume the proposed elimination of the budget deficit around 2019 will mark a return to ‘politics as usual’. But the reality of long-term financial projections is that policymakers, politicians and voters need to face up to profound choices. While the government and political parties appear to have accepted the need to eliminate the budget deficit, they are still not facing up to the urgent need for further reform to sustain public finances over the coming decades. Indeed, they are making further fiscal commitments which we ultimately cannot afford.

Fiscal consolidation – cutting the deficit – was the inevitable consequence of the collapse in tax receipts triggered by the 2008 recession. However, by the end of 2013/14 just 46% of the government’s consolidation plan had been achieved. During the next parliament, people will be seeing economic growth alongside substantial, sustained cuts in services. Historically, services have been cut during the bad times; such big reductions at a time of growth are unprecedented.

The government has added to the scale of the task by introducing high-cost plans, such as tax-free childcare and the Dilnot reforms to social care funding, for which there will have to be yet more cuts elsewhere to fund them.

None of these figures allow for potential future shocks, such as an exit from the EU, energy security problems, cyber risks or further global economic failures.

As the Office for Budget Responsibility observes, it is the ageing of the population that has the greatest impact on the future of public finances. The ONS estimates that the proportion of the population aged 65 and over will increase from 17.6% in 2014 to 27.1% in 2064. During that time the proportion aged 16 to 64 is forecast to fall from 63.6% to 55.7%.

Notwithstanding longer working lives, the economically active population will inevitably become proportionally smaller, and at the same time it will need to be even more productive to support the burgeoning generations of older people. Putting aside today’s emotionally charged debates on the issue, there is no getting away from the fact that future governments will need to give much more sober and serious consideration to the types and levels of immigration that Britain needs to sustain an economy productive enough to meet the needs of our rapidly ageing population.

Although improved growth prospects and service reforms should help to an extent, the big choices are limited and clear if debt levels are to remain sustainable: either taxes will have to go up, substantial cuts be imposed on budgets such as education, or care and pension levels will need to be cut. There are no other options.

Addressing these challenges will require strong political leadership. However, trust in politicians and public institutions is declining. According to the 2013 British Social Attitudes survey, the proportion of people who trust governments to put the nation’s needs above party fell from 38% in 1986 to 18% in 2012. This deficit of trust calls for a new approach to policymaking. It demands greater honesty, both in the UK and internationally, about questions of long-term sustainability, improved transparency of decision-making, stronger governance and financial management, and intolerance of costly failures to deliver public services and value for money.

In CIPFA's manifesto for sustainable public finances, over the next six months leading up to the election we are going to be engaging in the debate on six key points: 

 

1. Governments should budget for the medium to long term, and invest strategically to stimulate economic growth

Policies designed simply to win votes in the short term will only damage the public interest by undermining efforts to remove the deficit and reduce debt.

Rising demand from the elderly will make it increasingly difficult to balance their needs against those of other generations, given a largely fixed proportion of national income spent on public services. Growth will help determine the size of the spending envelope, and policies are needed to stimulate the economy. But governments will need to safeguard existing revenue, by not avoiding politically difficult decisions. In the case of local property taxes, the tax base is being hollowed out through frozen grants and the failure to revalue property. 

 

2. The government must rebalance the relationship between the citizen and the state

To achieve fiscal sustainability, a clear redefinition of the relationship between the individual and the state is required. It is likely to mean letting go of a raft of entitlements that the country cannot now afford.

The notion of the ‘cradle to the grave’ welfare state introduced after the Second World War needs to be redefined to reflect the growing proportion of older people and pressures on public finances. 

Central to Sir William Beveridge’s report that led to the creation of a social security system and the NHS was personal responsibility in providing the family with more than the minimum. Successive governments have increased the welfare bill with entitlements that go well beyond minimum needs. 

 

3. The structure of local government and the public sector needs to change to allow services to be provided more effectively and decisions on funding to be taken at the right level

The relationship between the centre and local communities is built on the idea that central government, by default, is best at devising and implementing policy and raising and spending money. Yet central government’s record in planning projects and spending efficiently and effectively is poor. In the words of the National Audit Office: ‘Historically, the majority of major projects in government have not delivered the anticipated benefits within original time and cost expectations.’

However, since 1997 the debate on devolution has been opened up by the granting of substantial tax and borrowing powers to Scotland and Wales, which are now set to be extended. Local government in England has gradually been allowed more freedom through initiatives such as localism, City Deals, Community Budgets and the partial localisation of business rates. 

In their vow to the Scottish people ahead of the referendum on independence, the leaders of the three main UK parties stated that ‘the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations’. CIPFA agrees with this aim. However, it considers that ‘the continuation of the Barnett allocation for resources’ in its current form will not achieve this, as the formula takes no account of relative needs. Equitable resource allocation requires a transparent needs-based funding system covering all regions of the UK, operated under the supervision of an independent commission of experts.

Also, we need to strike the right balance for devolved decision-making. While locally based services can identify and respond to local needs, if units are too small then service provision becomes inefficient as those in need cannot access specialist advice and services effectively. While more strategic organisations covering larger areas are better placed to take allocation decisions, they may not be able to take account sufficiently of local factors. 

We have earlier supported fiscal devolution, but this also requires accountability. Current alliances such as One North and the Greater Manchester Combined Authority are filling the gap, but they are not a long-term solution. All local people have a right to hold those responsible for public services to account.

 

4. Local public services must be better aligned to maintain delivery as budgets are cut further

Frontline services are delivered locally through an increasingly complex landscape – local authorities, NHS and Foundation Trusts, different types of schools, social enterprises, the voluntary and private sectors. At the same time budgets for local services are being cut – local authorities in England have suffered cuts of one third since 2010 and although NHS funding has been maintained, pressures within the system are building. The government is increasingly requiring local bodies to work together to deliver services (for example, in England through health and wellbeing boards and the Better Care Fund), but in most local areas the total public sector spending is unknown. The situation is similar across the rest of the UK.

Whitehall departments have changed drastically since 2010; according to the Institute for Government, they have reduced their administration costs by between 33% and 50%. But, as the institute observes, this focus on internal reform has come at the expense of attempts to get departments to work together more effectively.

The consequences of silo thinking in Whitehall are exposed most clearly in departments’ local work. Initiatives such as Total Place and Community Budgets, and the time taken to deliver tangible benefits, have revealed how disjointed and incoherent centrally controlled public services have become. Information, resources and ideas are not shared, common goals are not agreed, costs are duplicated and performance is undermined. Departmental boundaries – perpetuated by both civil servants and ministers – constantly frustrate collaborations to meet the needs of communities.

 

5. Financial transparency and accountability are key to restoring public trust

Public sector institutions have grown in complexity, making it difficult for the public and even politicians to understand lines of accountability for service quality and spending. Increasing numbers of services are being run by arm’s length external organisations, mutuals or social enterprises. These bodies are little understood by the public and, again, their accountability is unclear. 

Public trust has been further undermined by failures among new institutions, including foundation trusts, clinical commissioning groups and academy schools. Public service reforms should increase public confidence, not erode it. Governance and public financial management frameworks need to be strengthened. 

The current government has agreed to implement the Public Accounts Committee’s recommendations to mandate the use of open book accounting for contracts above an agreed level of expenditure. We need to see that agreement carried through.

 

6. The quality of state level financial management and governance demands urgent attention both in the UK and around the world

We hardly need to be reminded by Ebola or sovereign debt crises that countries across the world are now inextricably interconnected. This is why the poor quality of governments’ financial management around the world demands urgent, sustained and well-designed reform efforts. While much of the blame for the global financial crisis, and the consequent sovereign debt crisis, is blamed on banks, too little attention has been paid to the contribution of deficient accounting and poor auditing and financial management by governments. This problem is not confined to any one part of the world or category of countries.

Without good financial information and advice, ­policymakers and managers of public services fail to make sound decisions, leading to poor use of public money, inefficient services and the exposure of services, economies and people to avoidable risk. 

In its manifesto for change, CIPFA has highlighted the challenges and choices that voters, public institutions and political parties now face. As we head towards the 2015 election, CIPFA will be pressing the case for long-term, strategic policies to protect our services and standard of living in the decades to come. 

These are uncomfortable truths, but they have to be addressed now, with vigour, determination and openness. The public has a right to know the difficulty behind the options that lie ahead.

  • Rob Whiteman
    Rob Whiteman

    Chief executive of CIPFA since 2013, after leading the UK Border Agency and the Improvement & Development Agency. Previously, he was CEO at Barking and Dagenham council.

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