25 October 2018

Philip Hammond’s Budget must more clearly articulate his ambitions for reducing public borrowing. This would lay the groundwork for a more serious public conversation about the scope for public spending and the need for tax rises, argues Gemma Tetlow.

The Chancellor has set himself three debt and borrowing objectives. The first (the ‘fiscal mandate’) is to reduce public borrowing to no more than 2% of national income in 2020/21. The second (the ‘fiscal objective’) is to eliminate borrowing altogether by the mid-2020s. The third (the ‘supplementary target’) is for net debt to fall as a share of national income in 2020/21.

The first and third of these are on course to be met. The last official forecasts from the Office for Budget Responsibility (OBR), published in March, suggested that borrowing would fall to 1.3% of GDP by 2020/21, giving £15 billion of headroom against the fiscal mandate in today’s terms. Public sector net debt was also projected to fall from 85.1% of GDP to 82.1% between 2019/20 and 2020/21; this has been helped by the unwinding of a Bank of England scheme introduced after the Brexit referendum, which provided a temporary cheap line of credit to banks.

New commitments made by the Government since March – including higher spending on the NHS and a further freeze in fuel duty rates – have reduced this headroom, adding billions of pounds to annual borrowing. Theresa May’s promise earlier this month to end austerity also increases pressure for more public spending, since the last OBR forecasts for borrowing were predicated on the Government making further cuts to welfare benefits and further real-terms cuts to day-to-day spending on public services.

The Chancellor may be handed a fiscal windfall, but tough choices remain

But there is growing evidence that the Chancellor could be handed an unexpected fiscal windfall next week, which could restore some of his room for manoeuvre. Borrowing last year has turned out to be lower than the OBR thought in March. This year tax revenues (particularly from corporation tax) have grown more strongly than they predicted seven months ago. As a result, the Financial Times has estimated that the new OBR forecast could revise borrowing down by about £13 billion a year.

This change to the forecasts will make it easier for the Chancellor to muddle through this Budget. He may be able to pen the Government’s new firm spending and tax cutting commitments into the books, without either needing to relax his short-term borrowing and debt constraints or announce significant tax increases. He might even be able to loosen the spending envelope in the near term for public services outside the NHS; this could help prevent a worsening of some of the pressures being felt across services from prisons to adult social care, which the IfG and CIPFA’s Performance Tracker has highlighted.

But 2020/21 – when his fiscal mandate and supplementary target run out – is not far away. The remaining rule – to eliminate public borrowing altogether by the mid-2020s – is ill-defined. Even so, the OBR’s projections for longer-term public spending needs and tax revenues suggest current government policies are not consistent with achieving this objective. Indeed, the OBR’s projections suggest public borrowing is likely to start rising again unless the Government scales back the scope or quality of public services and welfare or announces new tax rises.

If the Chancellor is serious about eliminating public borrowing, it is likely to require a combination of tax increases and further reductions in the scope or quality of public services and welfare. These are political choices and ones that the Government must start making clear to the public.

The Chancellor should use the Budget to set out his fiscal ambitions

Ongoing Brexit negotiations mean there is an unusually large degree of uncertainty about the UK’s economic and fiscal outlook and what public spending needs will be. Nonetheless, the Chancellor should use the Budget to lay out more clearly his fiscal ambitions, which will guide the choices the Government will make about tax and spending. Doing so will provide the basis for a more serious public conversation about the trade-off facing the nation between the scope and quality of public services and welfare on the one hand, and the level of taxes on the other.

Comments

There is every indication that the Chancellor of the Exchequer thinks there is scope for further efficiency improvements to be extracted from the huge public sector expenditure programme – in other words, getting more for less.

But there remains a major hurdle getting in the way of this aspiration.

The government’s much heralded Industrial Strategy white paper finds that the skills and capabilities of those employed in the Private Sector need upgrading, if the UK is to realise its vision of a Global Britain and pay its way in the world, post-Brexit. But there is no recognition that people in the pay of the State – the other party to this Industrial Strategy, on whom its success is wholly dependent – are equally ill-equipped for their public sector roles. This lack of acknowledgment is not a surprise. The Industrial Strategy was, after all, written by people in the pay of the State!

It would also explain why there is very little confidence in the ability of big government to fix market failures, use the instrument of regulation to curb anti-competitive behaviour, manage outsourced public service contracts or secure value for money for investments made in infrastructure.

Indeed, the reputation of people in the pay of the State is further diminished by the fact that their ability to innovate, solve problems, learn from past mistakes and adapt to change, which is a distinctive characteristic of people in the Private Sector, has been erased in the Public Sector due to incessant conditioning of the mind from an early age. And, of course, people in the pay of the State are very good at talking a “big game” but they can’t “do it”.

But, what is especially worrying about people in the pay of the State is that they haven’t got a clue about what it is that drives the behaviour of for-profit organisations in the free market – not least, because they have not spent a single day of their lives in the Private Sector – and yet they have been put in charge of spending taxpayers’ money to the tune of £277 billion to buy goods, services and labour from non-public sector organisations.

Worse still, in specialised markets such as that in military equipment for the Armed Forces, the role of the regulatory authority and sponsoring agency has been combined in one department of state – the Ministry of Defence – which means that the independent scrutiny function, free from political interference, is non-existent.

So, successful capture of a department of state by the Defence Industry amounts to taking control over both roles!

In no other field of human endeavour are such ill-equipped people allowed to ply their trade as in defence procurement – which would explain why the Government has been getting appallingly poor value for money these last several decades.

Additionally, the culture in Whitehall has always put greater emphasis upon people who master rules, regulations and processes instead of valuing smart working, execution and delivery. What’s more, civil servants have migrated over the years, in overwhelming numbers, to the Private Sector via the revolving door in pursuit of a second career and infected it with these traits. Which would probably explain why the Defence Industry has failed so miserably to deliver equipment to the Armed Forces that is fit for purpose, adequately sustained in-service and constitutes value for money through-life – bearing in mind that 99% of people who work in the Defence Industry right now were previously in the pay of the State.

Instead of doing the decent thing and educating people in the pay of the State about the ways of the Private Sector, defence contractors are busy exploiting their ignorance, for one purpose only – relieving them of taxpayers’ money – which has, in itself, left the public finances in pretty bad shape.

It’s not so much a lack of skills in Whitehall that is the problem, but a surplus of people with the wrong skills. Some people say that they can be retrained to equip them with the necessary skills which will enable them to deal with today’s challenging public service tasks. But the undeniable truth is that these people are simply beyond repair!
@JagPatel3

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