The fiscal squeeze: now it gets real

1 April 2011

Today marks the start of the government's financial year, and with it the point when our fiscal squeeze gets real. It is easy to forget just how large the challenge we have set ourselves is.

I’ve just returned from giving a seminar in Berlin to public servants from various European countries. They were eager for more details on the UK’s fiscal consolidation.

When you tell our international friends that the UK is, for example, taking 20+% out of our law and order budget, a regular response is that “we are doing the same – a 10/20/30% reduction in the administration costs of our police”.

It takes a little while for the penny to drop that our 20+% applies to the whole budget – administration, police pay, running costs of prisons, etc. The next question is invariably “do you really think the UK can achieve that?”

Where it depends on political capital

This is, of course, a question whose answer is automatically “it depends”.  The challenge has many elements. Many of the tax rises have already come in, with more due next week. But the almost 80% of our consolidation that comes from spending reductions is only just beginning.

Many welfare cuts come into effect today. Further reductions in subsidy regimes will take longer – for example university teaching grants fall in 2012-13 (with the income to be replaced by tuition fees), while legal aid reductions are expected to be fully delivered by 2014-15.

All of these will be a challenge, but it is largely political rather than operational. So for these changes, “it depends” mainly on your assessment of the government’s political capital – has it enough to drive them through?

Where it depends on capacity to manage change

The major operational challenges lie elsewhere – in the cuts to public sector organisations’ own running costs. Some portents for the future are already visible in Whitehall itself. The latest headcounts statistics for the civil service show that the Department for Business, Innovation and Skills reduced by almost 10% in the last quarter of 2010.

The Central Office of Information (CIO) shed 35% in the same period. But the overall message from the numbers is not much has yet changed. This will alter dramatically in the coming months. By the end of the year, the statistics should be reflecting the major reductions in the senior civil service and beyond occurring in departments such as Communities and Local Government, Transport, and Justice.

However, other departments are moving more slowly. There is quite a debate about the correct strategy here:

  • is it best to take the pain quickly, allowing the smaller organisation to concentrate on its future?
  • or – should Whitehall departments concentrate on managing the change for the rest of the public sector, postponing their own reorganisation until these are achieved?

Whether the UK can achieve its planned consolidation depends crucially on public sector managers getting calls like this right. There are few funds to bail out failing organisations, and little spare political capital to spend on absorbing service failures. So for these changes, “it depends” mainly on your assessment of the public sector’s capability to manage change.

Ironically, a government that has been seen to question the effectiveness of the public sector is implicitly relying on it being able to pull off a feat that makes our international friends’ jaws drop.

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Comments (2)

  1. Ralph Musgrave on 22 June 2011 at 4:04 pm

    Your entire thinking is microeconomic, as is the thinking of most of those commenting on deficits, fiscal consolidation, and so on. In contrast, government, its deficit, and so on are in the realms of macroeconomics.

    Where a microeconomic entity (e.g. a household or business) has a deficit, it has to cut spending or raise income. This does not work at the macroeconomic level. In fact, there is even evidence that attempts to cut government deficits have the OPPOSITE of the intended effect. I.e. attempts to cut deficits actually INCREASE deficits. See:

    http://www.debtonation.org/wp-content/uploads/2010/06/Fiscal-Consolidation1.pdf

    The world of macroeconomics is an Alice in Wonderland for those not acquainted with it. My own preferred method of reducing the debt and deficit, which is very much Alice in Wonderland, is simply to print money and buy back the debt. That on its own would be too inflationary, but that’s not a problem. That inflationary effect can be countered by getting some of the money for the buy back in a deflationary way: raise taxes. As long as the above inflationary and deflationary effects cancel out, there’d be no net effect on GDP, total numbers employed, and so on. See:

    http://ralphanomics.blogspot.com/2011/06/fast-fiscal-consolidation-would-not.html

  2. Lesly on 21 August 2012 at 3:48 am

    Very informative post, I must say. This post is fully eniguraocng in its own ways and I am sure that it will even succeed in inspiring many people like me.And yes i have tweeted your site .

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