17 July 2018

In a week dominated by Brexit and Trump, two dry reports about the UK’s public finances are unlikely to receive a lot of press coverage. But they pose a challenge to government that will endure long after Brexit, argues Martin Wheatley.

The Office for Budget Responsibility (OBR) was set up to ensure public finance numbers are independently verified and published in an un-spun way (more on this from us in our recent report on health and social care funding). In addition to regular forecasts and commentary, it publishes a Fiscal Sustainability Report every two years, setting out 50-year projections for revenue and spending.

Last year the OBR also published, at the Government’s request, a Fiscal Risks Report, setting out no fewer than 57 risks to the future public finances. The Government’s response, Managing Fiscal Risks, was published today, alongside this year’s Fiscal Sustainability Report from the OBR.

The longer-term picture is deeply worrying

Both are full of insight into public finance issues and well worth a read. The Government is also right to take risk seriously: as Philip Hammond says in his foreword to theTreasury report, “Managing fiscal risks is about responsible government.” But the two documents, taken together, ought to leave anyone concerned about the future of this country deeply worried. Why?

Starting with the OBR’s annual report, the main news is a worsening of the already disturbing long-term outlook for the public finances. Last year the OBR was projecting that, on unchanged policies, the deficit would widen to 7.4% of GDP by the 2060s, and government debt would be 2.4 times GDP (a level only previously reached in the Second World War). This year’s report increases those projections still further, to 8.6% of GDP and 2.8 times GDP respectively: levels which are clearly not sustainable. As OBR Chairman Robert Chote noted drily, “In practice, policy would have to change to avert this.” That is, more tax, big spending cuts, or most likely both.

The main reason for this worsening outlook? The Government’s announcement of increased spending for the NHS last month which, as OBR puts it, “can be interpreted as a crystallisation of medium- and long-term risks that we highlighted in our 2017 Fiscal Risks Report.” Not only is the population growing older rapidly, but NHS productivity isn’t improving strongly, and technological developments in healthcare which improve outcomes but increase costs continue to be adopted.

As the OBR notes, the Prime Minister’s assertion that the NHS announcement would be funded by a Brexit dividend is contrary to its finding that “Brexit is more likely to weaken the public finances than strengthen them” and “Government has not set out the size or composition of any additional taxpayer contribution.” When it comes to the Treasury report, actions speak louder than words. It makes a lot of firm rhetorical commitments to managing public spending, borrowing and debt. It describes large numbers of good system improvements. However, its publication comes four weeks after last month’s NHS announcement. Outside a spending review, where such decisions could be expected to be made, the Government's pledge on the NHS promised lots more money without addressing the associated risks. It did not nail down how the NHS is going to bear down on costs, what the NHS and other public services are going to do reduce the incidence and seriousness of ill-health, or what spending cuts or tax rises are going to pay for it. 

The report also suggests a touching reliance on improvements in management systems alone to deal with spending pressures and risks. For example, it cites the introduction of the cap on welfare spending as a way of dealing with upward pressure on benefits. The introduction of the welfare cap makes it clearer whether benefit spending is heading off the rails. However, the Government has recently weakened the way it operates, and it doesn’t make the politics of getting welfare cuts through a hung Parliament any easier.

These reports should be read by more than a select few

Where next? The content of these reports needs to be thought about far more widely than select economists, pundits and financial journalists. The Government needs a strong response, and it can start with next year’s spending review.

Building on the improved transparency about future spending and risks which it has already established, next year’s spending review needs to focus at least as much on mitigating long-term pressures on public spending as fixing budgets for the short term.

Ministers should be thinking, maybe in the creative ways we have suggested for health and social care, about how they can level with all of us about the choices we (ultimately) are going to have to make about the balance between public sector and private provision, and how much money we keep for ourselves or hand over to government to spend on our behalf.

Comments

It's not the case that we can choose whether to 'keep money for ourselves' or hand it over to the government to 'spend on our behalf'. We either socialise the cost through taxation to spread the burden of risk equitably; or, we insist on a version of a 'pay per use' system. In the latter case, it is inevitable that this will involve a wealth transfer from the many to the few. As we all age and often become less healthy, it is just a question of whether this happens now or later. Any system of insurance will increase the costs of healthcare, as we see in the USA, and most likely disadvantage the most vulnerable who are often the least healthy. Perhaps as system of taxation that recognises that the people benefiting most from the public goods of a healthier population, functioning road system, effective policing, first class fire services, a just legal system, secure and effective prisons, and adequate air and sea port infrastructure, etc., are the top 5% of people. Perhaps closing the loopholes in the systems that allow the wealthiest to pay less tax as a proportion of their income than the majority would be a good place to start. Nick Hanauer has this right in his arguments about the myth of trickledown economics. Significantly increase the minimum wage, end the public subsidy of poverty pay, close the tax loopholes, improve the education system so that people are prepared with the skills required by employers (from primary to higher education and in vocational skills). That will bring in more tax income and everyone except, perhaps, the top 5% will be better off.