Reform Bulletin

10 March 2008

Bulletin - 10 March 2008

A lost decade: Counting the opportunity cost of public spending 1999-2008

• Reform today publishes its pre-Budget report. A lost decade: Counting the opportunity cost of public spending 1999-2008 is available at www.reform.co.uk.
• The report argues that the public sector expansion begun in April 1999 has failed to achieve its stated aims, has restricted economic growth and has left the UK ill-placed to face the challenges of the next decade. While the Government has pointed to strong growth during this period, 29 per cent of GDP growth has been generated by a bigger public sector. In his forthcoming Budget, the Chancellor should reject the inputs-led approach in favour of a sustainable “fiscal footprint” for the UK.
• The Government justified its programme of public spending increases on the grounds that it would transform public services and boost the UK’s productivity. These aims have not been realised. The scale of spending increases and the absence of reform means that they have acted as a flash flood rather than the planned irrigation that was needed. Public spending on R&D and enterprise has failed to deliver a more entrepreneurial culture and has crowded out private sector innovation.
• While many competitor countries have been moving towards fiscal consolidation, the UK has been increasing levels of public spending and borrowing - its “fiscal footprint”. Government spending is now well above the average for OECD countries, the budget deficit is amongst the largest in the OECD and the UK has moved from having the fourth lowest gross public debt in the Euro 19 Area to the ninth.
• The report commends the words of the Cabinet Secretary, Sir Gus O'Donnell, who in a recent speech summarised the challenges for the UK’s economic and public sector for the coming years:

- “We are going to have real problems. Because of the competitive nature of globalisation, it is going to be hard to put tax rates up. The increasing demand for spending more... means that we are going to have to do more with less.” (7 February 2008, speech at The Guardian Public Services Summit).

• The UK Government and the wider UK political debate now need a change of attitude as well as policy. Above all there is a need to move beyond the Pavlovian reflex of committing more public money wherever there is a problem.
• The report concludes that the 2008 Budget is an opportunity for the Chancellor to set a new path towards a smaller, sustainable fiscal footprint and reformed public services. In the short term, greater public sector productivity can solve the Chancellor’s problem of reducing borrowing without the political difficulties of raising taxation or cutting spending. In the long term, the social and economic trends of the next decade – such as the increasing difficulty of raising taxation due to globalisation – mean that a new approach is essential.
• The report’s findings were discussed this morning at a Budget breakfast seminar at the British Bankers’ Association. The panel included Angela Knight, Chief Executive of the British Bankers' Association and former Economic Secretary to the Treasury, Ross Walker, UK Economist at RBS Financial and Elizabeth Truss, Reform’s Deputy Director:

- Angela Knight said that there was now an international question mark over the future attractiveness of the UK as a financial services centre. The international banking community could be reassured by a Budget that rules out further increases in regulations, confirms that the changes to the tax regime for non-domiciled residents will end with the current proposals and promises a comprehensive review of corporation tax with the intention of reduction.

- Ross Walker said that the 2008 Budget would be the most difficult that any Chancellor has had to deliver for a decade and a half. He expressed concerns that something has gone “very wrong” with fiscal policy as the UK is running a deficit at the peak of an economic cycle. Ross said that there is now a “vacuum” in fiscal policy which must be addressed in the Budget.

- Elizabeth Truss argued that: “We need to get more value out of the money we currently spend: but more than that, we need to empower individuals to drive change in public services.”

- The main points raised in the breakfast discussions were the fears over the potential damage to the UK economy from the changes to the tax regime for non-domiciled residents, including the impact on foreign students and professors as well as business; the need for the UK tax legislation to be simplified to improve the UK’s position as a competitive business environment; and that the credit crunch will undermine business confidence going forward.

• Writing in the Daily Mail, Andrew Haldenby, Reform’s Director, says that the time has come to make our cash go further. Andrew argues:

- “Sir Gus has given the Chancellor his new policy on public services. The Government has spent eight years doing the same with more. It needs to start ‘doing more with less’. The Budget should launch a no-holds-barred reform of the public sector and of efforts to link welfare benefits with work. Mr Darling then needs a new policy on growth. His goal should be a low tax economy, with strong incentives to work and save and strong private consumption. The UK can move with low tax countries such as Australia, Ireland and New Europe or it can drift towards the social democratic mean with low growth, rising unemployment and an unsustainable fiscal footprint. As much as anything the Chancellor needs a new attitude - one which recognises, for example, that public spending imposes costs on the economy, and that higher spending does not equal better services.”

• In an article on the Spectator blog, Elizabeth Truss, Reform’s Deputy Director, and Lucy Parsons, Reform’s Economics Research officer, say:

- “The Conservative Party has clearly made significant steps in this direction. The recent suggestions of major increases in taxpayer-funded health spending, however, suggest that the Party may still be uncertain about a long term reduction in government. The Liberal Democrats also have a chance to capitalise on their successful commentary around the Northern Rock affair to focus on the economic competence of the Government's spending policy. Both parties now have an opportunity to challenge the Government on the course of UK fiscal policy at this week's Budget.”

• Writing in The Daily Telegraph, Janet Daley says:

- “A report today by the think tank Reform has a wonderfully illuminating metaphor for the Brown public-spending spree: ‘The scale of spending increases – and the absence of reform – means that they have acted as a ‘flash flood’ rather than a ‘planned irrigation’.... To pursue this vivid picture, the flash-flood effect - in the case of paying GPs more for doing less, for example - has actually washed away some of the topsoil and reduced productivity levels. What Reform also makes clear is how dangerously the expansion of public spending has skewed the balance of the economy.”

• In his column in The Guardian, Larry Elliott, Economics editor, writes:

- “Today’s report by the centre-right thinktank, Reform says that instead of planned irrigation, there has been a flash flood of extra spending that resulted in ‘doing the same thing at a higher cost’. Ministers have a duty to answer this charge, not least because it is clear that the same thought has occurred to the public.”

• The paper is also reported by the Daily Mail and The Sun.
• For more information, please contact Lucy Parsons at Reform.