Come the glorious day, someone else will pay

Last week, the FT ran a series of articles on public spending cuts. Its summary:

Half way through 9 years of planned austerity, the FT has uncovered that more than half of government cuts are still to come. And they will be twice as large as David Cameron’s £25bn figure.

I had a busy week so still haven’t finished reading all of it. If you have time, it’s well worth working through.

The FT’s main finding, after crunching the numbers on the government’s forecasts, is that a further £48bn of spending cuts will be needed in the next parliament if an absolute surplus is to be achieved by 2019. This is £10bn higher than the figures calculated by the IFS and the Resolution Foundation  (see previous post). There are (as I read it) two reasons for this. Firstly, it includes the cuts for 2015-16. These budgets will already have been set by the time of the next general election though most of the year they apply to will fall into the next parliament.

Secondly, the FT has also included “the effect on departmental spending of rising numbers of pensioners and increases in pension payments” in its analysis. Look at the ‘Social security’ column; the FT reckons spending will continue to rise, while the government’s forecasts show it falling, albeit very slowly, over the next four years. (Given what the IFS said yesterday about pensioner benefits, housing benefit and tax credits combining to thwart the government’s attempts to cut welfare costs, the FT’s take may well turn out to be right.) To meet the deficit reduction target, any increase in social security spending has to be found from cuts to public services.

According to these calculations, then, the austerity programme is only half-way through and, in terms of cuts to spending on day-to-day public services, not even that.

As Chris Giles says:

So far, the public sector has coped better than many expected. But with employees more restless about slow wage growth and the easier cuts already achieved, many experts think taxes are more likely to rise than fall after the next election to protect public services and keep the deficit falling.

A week or so before the FT articles, Deloitte published its State of the State report. Its tone is broadly in support of the government’s deficit reduction plans, which makes some of its caveats all the more interesting.

The fiscal consolidation programme can be viewed in two distinct halves, divided by the 2015 General Election. The spending cuts in each half will drive different cost reduction activities in the public sector. The first half has seen cuts to public services and administration that were typically managed through pay freezes, contract renegotiations, savings realised through shared service arrangements and workforce reductions. At least 95 per cent of English councils, for example, are now involved in some form of shared service arrangements.

The second half of the programme will be substantially more challenging. As the cuts reduce budgets, public sector organisations will not be able to cope in the same ways. Those faced with particularly deep budget reductions will need to rethink how they operate, the services they provide and the outcomes they can deliver. In local government for example, councils are likely to focus on services targeted towards people in particular need and move away from the services they are not legally required to provide such as leisure facilities.

While the first half of the consolidation period has seen public sector organisations cut costs and deliver tactical improvements, the second half will see many redefine themselves and move to lower-cost models in order to cope with the next wave of budget reductions.

In other words, all the obvious savings have been made, a point not lost on the public sector managers interviewed for the report.

While the executives we interviewed were generally upbeat about their change management and resilience over the past five years, most were less optimistic about the next five. Some told us about a sense of fatigue and many expressed a real worry that their organisation or its wider sector would not be able to cope with continued austerity beyond the next UK General Election.

Most recognised that the cuts to come would be more challenging than those already achieved. They told us that the ‘low hanging fruit’ has been exhausted and that their approaches to cost reduction in the past five years will not be sufficient for the next five. The changes they expect to make to cope with further funding reductions will have increasingly profound implications for their organisations and the services they deliver.

Public sector organisations have frozen pay, cut back office functions, merged departments, shared services with others organisations, removed layers of management and re-worked their processes. They have also hammered their suppliers, sacked their contractors, slashed their training budgets, eaten into reserves and quietly cut services they think people won’t notice, at least, for a while. Some of this has led to real efficiency savings, maintaining services while reducing their costs. In other cases, organisations have simply taken out costs which will damage services in the longer term or which will appear somewhere else.

In addition to budget cuts, many interviewees spoke about increased demand for their services created by cuts in other areas of the public sector including welfare reform.

This is a particular problem in areas like social work, housing and, of course, A&E. If the charities that used to look after the distressed, the alcoholic and the drug-damaged have their grants withdrawn, the people they used to help will eventually turn up at the local hospital or council offices. All of which puts extra pressure on services.

Then there’s this:

Public sector chief executives believe that national politicians could do more to lead a national debate in what citizens should expect from the public services and local politicians could do more to engage citizens in what they should expect locally. At present, there is a perception that both national and local politicians often criticise public services but rarely help citizens appreciate that spending reductions may lead to reduced levels of service.

The result is that citizens may have unrealistic expectations about state provision at a time when citizens are expected to take more responsibility for themselves.

To sum up, then, making a further £48bn of spending cuts means that the state will have to stop doing some things. The Deloitte report mentions leisure facilities but flogging off or closing parks and sports centres won’t get us anywhere near the savings needed. Those charged with making the cuts know that this means a rapid descoping of public services. 

No-one has explained this to the voters though. Citizens have unrealistic expectations because politicians have allowed them to think that the axe will fall on someone else. Depending on party ideology, those bearing the brunt of the cuts will be lazy welfare claimants, migrant benefit tourists, underworked public servants, over-bonused bankers or the rich. No-one is telling Mr and Mrs Middle-Income that they are going to have to pay more tax and/or see much more drastic public spending cuts.

The FT editorial which accompanied its Britain and the Cuts report was scathing:

[T]his is not the impression anyone would receive from listening to recent political rhetoric. In a recent conference speech, David Cameron, the prime minister, misleadingly claimed that the government was four-fifths of the way to its goal of achieving fiscal balance, leaving scope for a costly middle class tax cut. Financial Times analysis, alongside that of think-tanks such as the Institute for Fiscal Studies, suggests instead that Britain is less than half way towards Mr Cameron’s fiscal surplus.

It had sharp words for Labour too:

The prime minister is able to get away with this obfuscation because of disarray in the opposition Labour party. Asked to explain how he would deal with the budget squeeze, Ed Balls, the shadow chancellor, offered up savings of just £100m on child benefit – barely a thousandth of what is needed. UK voters face the prospect of an election where the overriding political issue is either ducked or fudged.

It’s more than just Labour disarray though. The party is colluding in the fiscal muddying. This weekend it was shouting about taxing millionaires and bankers’ bonuses. However you decide to define banks, bankers and bonuses, none of this will raise very much money. Labour’s Mansion Tax is simply Land Value Tax Lite, a property tax but only for those with very big houses. A tiny number of people would pay it and it would make very little difference to the property market or to tax revenues. Labour’s message is just the flip side of the government’s. Don’t worry, someone else will pay.

The FT concludes:

Fiscal credibility should mean setting out plans that are realistic and believable. None of the major parties has come close to setting out an answer to Britain’s fiscal dilemma. At the very least, they should come clean with voters about the nature of the questions that need answering.

If they don’t, then a lot of people will be in for some surprises over the next five years.

Ah, did we forget to mention the 8p rise in income tax?

Of course we’ll eliminate the deficit by the end of the decade. It will be gone by 2030!

Well I know abolishing social services wasn’t in our manifesto but….

After the election, whoever has won will have to move out of La La Land and make some hard choices about what happens next. At least one of the three pillars in the 2015 dilemma will have to give. My bet is that all of them will; higher taxes, more borrowing and some spending cuts. Yet here we are, 6 months before a general election, with politicians still trying to kid us that someone else will pick up the tab.