The Economist has a series of articles on the future of the state. The paper’s broad conclusion is that western welfare state can’t go on as it is. Its editorial describes the state spending of the 2000s as “one last splurge” and predicts that, over the next decade, all western states will shrink or, at least, cease to grow.
A report by the National Institute of Economic and Social Research (NIESR) last week painted a similar picture. It found a shortfall of 6.5 percent of GDP between the spending that would be needed to sustain current levels of state provision over the long-term and the projected tax revenues. The graph on page 13, (which it won’t let me copy) makes interesting reading. It shows the gap between spending and revenue narrowing up until 2018, as the UK’s fiscal position improves, but then widening again as the long-term effects of an aging population kick in. The report’s stark finding is that:
[T]he succession of budget measures including those announced in the June budget have the effect of closing the gap between revenue and expenditure in the short term. But the changing demographic structure of the population means that in the long term a gap re-emerges which has to be closed by means of some combination of tax increases and spending cuts.
In other words, the economic recovery and the government’s spending squeeze will only get us out of fiscal trouble in the short-term. During the 2020s and 2030s the demands on public spending will increase at a faster rate than the UK’s GDP growth. For future generations to enjoy similar levels of state provision that we have at present, say the report’s authors, spending as a percentage of GDP will need to rise to somewhere in the mid to late 40s.
This is slightly more optimistic than the 52 percent predicted by Ernst & Young and the 2020 Trust but not much. NIESR’s conclusions still take the UK’s public spending well beyond its traditional non-recession norm of just under 40 percent.
Now it may be that the British attitude to taxes will change and people will be willing to fund state spending at 48 percent of GDP. So far, though, there is no indication of a shift to a Swedish mind-set on taxes in the UK. Furthermore, as the Economist warns, the emerging economies do not seem keen to emulate the western welfare state and a tax take of this size could damage the UK’s competitiveness:
The mobility of talent, technology and capital surely puts some limit on governments’ ability to keep on raising taxes. Government is becoming a more competitive business, not just in terms of lower spending but also in what it offers for the money.
The likelihood, then, is that the gap will be closed by a combination of tax increases and spending cuts. Future generations will pay more tax and get less for it than we do now.
NIESR’s findings therefore imply that, over the next twenty years, more cuts to the public sector will be needed on top of those made by George Osborne. To maintain anything like a decent standard of welfare provision will therefore require a complete reorganisation of the public sector.
This still hasn’t dawned on many people. A friend of mine who is a director at a public sector organisation remarked:
People keep talking about ‘when things get back to normal’. They don’t realise that things will never get back to normal, at least not in the way they have understood normal in the past. What we are seeing now is the shape of things to come.
Last Friday, Philip Collins, a former advisor to Tony Blair, predicted that the decentralisation of public services could see the civil service shrink to a fifth of its current size. He said:
I don’t think the civil service has got that message and when it gets it, I don’t think it’s going to like it.
As I have said before, we are past the Peak State point. The Economist is almost certainly right – the public spending of the last decade was a final splurge. It is extremely improbable that we will see its like again. This presents the public sector with two major challenges. Firstly, how to ensure that the level of provision doesn’t fall by the same amount as spending, or how to do a bit less with a lot less, and secondly, how to do this against a background of ever rising public expectations.
At the moment, most people, including many in the public sector, still think that ‘things will get back to normal’. The long-term projections, though, suggest that they won’t. Whoever wins the next election, the British state will never be the same again.