Patrick Nolan

What you need to know ahead of the spending review – making the case for cuts

What you need to know ahead of the spending review – making the case for cuts
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This is the next of our posts with Reform looking ahead to the Spending Review. Earlier posts were on health, education, the first hundred days, welfare, the Civil Service, international experiences (New Zealand, Canada, Ireland) and Hon Ruth Richardson’s recent speech.

Last night the BBC showed 12 major regional television debates examining impending cuts to public sector spending. I spoke at the debates in London and the East of England (held in Ipswich). There were interesting similarities and differences in the two debates and these illustrated some important lessons for the spending review.

Both debates showed that there is still work to do to explain to the public, and some commentators, the case for eliminating the deficit in one Parliamentary term. At both events some speakers and audience members appeared to be living in a fiscal fantasy land and failed to recognise the real cost of living on borrowed money. Spending more on servicing debt than on schools is not sustainable. In London some of the biggest applause was when speakers fell prey to the temptation to take cheap political shots and argued that, rather than spending cuts, bankers should pay.

In Ipswich, however, there was a vocal section of the audience who felt that the government needs to get its fiscal house in order. The biggest cheer from the audience in the East of England event came after filming had finished and when one audience member challenged panellists for refusing to acknowledge the contribution that previous government “mismanagement” had made to the current fiscal crisis.

The East of England debate also highlighted the need among the business community for greater clarity over where the axe on spending will fall. It is widely recognised that an outcome of fiscal consolidation will be for a significant fall in public sector employment. For the private sector to expand to help offset these job losses private businesses will need to have confidence to invest. This confidence will require a stable business environment and for the coalition’s plans regarding fiscal consolidation to be clear.

A point that was made by a small minority of people at both events, but was particularly lacking in the London debate, was that the quantity of government spending should not be confused with the quality of this spending. More spending is not the answer to problems such as low public sector productivity and expensive and underperforming public services. Fresh thinking is needed. As Hon Ruth Richardson, a former New Zealand Minister of Finance, emphasised at a recent REFORM conference and on CNBC:

'While it is convenient to focus the current fiscal debate on the cyclical influences, the truth is that we have a structural problem on our hands. I know from experience that the only sure way to decrease public expenditure is to examine and then eliminate functions not critical to the core, budget in terms of outputs not inputs, require public accounts to conform to generally accepted accounting practice, and institute credible fiscal rules.'

Patrick Nolan is Chief Economist at Reform