The Coalition built its policy around the need to cut the deficit and right the public finances; the incoming Conservative government has declared its intention to “finish the job... in a balanced way.” A careful examination of the numbers suggests it might require a different approach from that of the past five years.
If the Conservative manifesto is to be believed, the party intends to cut one per cent of government spending each year for the next two years, coupled with a freeze on income tax, National Insurance contributions and VAT. After balancing the Budget they intend to run a surplus in ‘normal economic times’ in order to reduce the national debt.
The incoming government is likely to struggle to achieve that rate of spending cuts; in 2010, the Coalition also set out a far more ambitious path for spending than it eventually achieved. The past fifteen years of fiscal policy show a similar pattern: successive governments have failed to stick to their fiscal plans, despite a series of fiscal rules and commitments. The greatest fiscal achievement of the Coalition is the establishment of the Office for Budget Responsibility, which has held a magnifying glass to the government’s plans and eliminated the optimism of previous fiscal forecasts.
The most important judgment the OBR renders each year is on the fiscal sustainability of the government’s policies. In each of the past five years it has projected that the current policy settings will cause debt to spiral through 200 per cent of GDP over the coming decades. The main culprits are rising healthcare and pension costs, which are exacerbated by the ageing of the population.
The OBR has not yet measured the Conservative’s manifesto plans, but the policies provide little reason for optimism: the plans are clearly focused on the next five years, with little thought given to the long-term implications. Promises to protect the education and NHS budgets, along with the triple-lock on pension incomes, guarantee that spending will continue to rise. The Conservatives are right to be concerned about the welfare of people who use these services, but that can be achieved through improvements to the structure and delivery of services, rather than through unsustainable protections on the level of spending.
There is only one way to improve public services while avoiding increases in spending: improve the productivity of public services and provide people with better value for their taxes. Despite the recent economic stagnation, the productivity of the whole economy has still risen at about five times the rate of public sector productivity over the past fifteen years. However, over the past five years there have been encouraging improvements in the performance of large spending areas, such as healthcare and education.
A relentless focus on productivity over the coming Parliament could improve long-run fiscal sustainability, while also improving the quality of public services for users. Simon Stevens, Chief Executive of NHS England, believes that improvements in NHS productivity could save £22 billion over the next five years. Through an injection of new ideas, similar savings are likely to be possible in other spending areas.
A Parliamentary majority gives the Conservatives the opportunity to set out a bold programme for government. The party has endured one term of office hamstrung by the spectre of bond vigilantes, but that threat has now faded. Through a relentless focus on productivity, and the welfare of households, this government can leave the UK with sustainable public finances, better ready to weather the next crisis.
