Reform held a panel discussion on 19 March 2013 entitled "Pre-Budget Briefing 2013: Making fiscal policy sustainable." It featured a panel comprising Ben Gummer MP, Sam Fleming (Economics Editor, The Times), Piers Ricketts (Partner, KPMG), and Dr Patrick Nolan (Chief Economist, Reform). The discussion was kindly hosted by KPMG and resulted in a wide-ranging discussion, summarised below.

By Patrick Nolan

Reform roundtable seminar on childcare on "the costs of debt financing" on Tuesday 3 July 2012. Introduced by Jonathan Portes, Director, National Institute of Economic and Social Research.

By Patrick Nolan

The record low cost of government borrowing in the UK has led to calls to use debt financing to fund capital spending. Jonathan Portes, Director of the National Institute of Economic and Social Research, has estimated that with an interest rate of 0.5 per cent increasing debt by £30 billion would cost £150 million a year. This estimate generated debate over how much debt financed public investment actually costs. What is the impact of inflation? Should the tactic be to simply refinance debt in the future? What would it take to trigger a flight from gilts and are there implications of this borrowing for future generations?

To explore these issues in greater detail Reform recently held a Reformer lunch with Jonathan Portes on the costs of borrowing and the implications for fiscal policy. This event was the second in a series of “austerity debates” and was held under the Chatham House rule.

The first area of discussion was the causes of low long term interest rates. This is significant as if long term interest rates are driven by weakness in the economy and not by deficits and debt then further borrowing could have little impact on rates in the future. It was argued that the risk from greater borrowing could be relatively low as there is significant spare capacity in the economy (implying less crowding out). But it was also noted that even if the Government can currently borrow at low rates this cannot continue indefinitely (there is no infinitely lived indexed linked gilt) and at some debt level market confidence would be lost.

Further, just because borrowing is cheap it should not be assumed that more borrowing will automatically increase growth. Borrowing should not be seen in isolation from what it is spent on. Areas for possible spending include infrastructure and house building and borrowing to fund tax reductions. Yet there was concern that extra spending by government would fail to be growth enhancing and that increased borrowing could reduce the efficiency of spending by reducing pressure on budgets. There was a view that with government spending 46 per cent of GDP there is scope to increase growth through improving the efficiency of existing spending rather than borrowing to spend more.

The role of the business and household sectors was also noted. The Government is not the only actor that can borrow at low interest rates and yet many businesses and households are reducing their debts. This may reflect liquidity issues but could also reflect a desire of businesses and households to build up balance sheets in the face of uncertainty. Problems in the Eurozone are a major cause of uncertainty. (As an aside it is important to note the difference between the UK’s position and that of other European countries as the UK can continue to borrow in its own currency.)

Uncertainty can also reflect doubts over a government’s medium term plan for the public finances. Borrowing will have to be paid back and so more borrowing now means taxes would have to be higher or consumption lower in the future (depending on the growth effects of more debt and what the borrowing is spent on). This, in turn, reduces incentives for investment (although there is debate over whether these conditions (Ricardian equivalence) hold when there is spare capacity in the economy).

Government borrowing also has implications for intergenerational equity. But, again, this reflects, among other things, what borrowed money is spent on. If it is used to create an asset which is passed onto future generations then this may be equitable, but there is much less of a case for borrowing to maintain current consumption. Borrowing can also create a “dead” area of public spending (spending that is “lost” on servicing debt). In this context it was discussed how the Government now is spending more on debt servicing than education, although this is not, by historical standards, unusual.

The difficulty in sticking to a medium term plan to reduce borrowing should not be underestimated. Not only is there the challenge of identifying when the “short term stimulus” should end and be replaced by fiscal prudence, in the face of an ageing population fiscal prudence will involve increasingly difficult policy choices. The UK public has a revealed preference for, for instance, keeping taxes below 38 per cent of GDP, providing public services free point of use, projecting military power onto the world and maintaining free social care to protect children’s ability to inherit houses. Yet it is not possible to have it all. It is inevitable that at some point the bill will have to be paid and the political process will have to answer some hard questions. With the speed at which the UK population is ageing this need to face up to hard decisions will come much sooner than expected.

Reform roundtable seminar on family finances on Tuesday 15 May 2012. Introduced by Lord Wilf Stevenson, Chair, Consumer Credit Counselling Service.

By Patrick Nolan

Earlier this week Reform held a roundtable event on Putting family finances on a sustainable footing. Lord Wilf Stevenson, Chair, Consumer Credit Counselling Service (CCCS), introduced the event, which was held under the Chatham House rule.

Many UK households are on a financial knife edge. CCCS research shows that 8 per cent of households in Great Britain spend more than half their incomes on total debt repayments and the average household pays nearly £200 per month in interest payments. 30 per cent of households have no spare cash at the end of the month and more families are turning to high cost credit. These challenges are not confined to a relatively small group of low income families; CCCS research has shown that families on higher incomes are struggling with debt too.

The upshot is that many families would struggle to cope financially if they experienced a drop in income, increase in expenses, or other changes in circumstances. And they are likely to remain vulnerable for a while. The labour market outlook is weak and prospects for real wage growth are not great. Concern has been expressed over food, fuel and utility bills, HMRC debt recovery procedures, and increasing rent bills and mortgage rates. Already 10 and 6 per cent of CCCS clients are in mortgage and rent arrears, respectively.

Policy changes, such as the public sector wage freeze and reform of the welfare system, have increased pressure on some families. The Universal Credit will test families’ financial capability through paying benefits monthly and paying housing benefits to recipients not to landlords. Problems with debt can often be part of a downward spiral – with there being, for example, a link between problem debt and depression.

While it is relatively easy to point to problems, developing workable solutions and identifying the role that government should play in these solutions is harder. Developing solutions will require facing up to some hard questions, which will be the subject of future Reform events. These questions include, for example:

• Is the supply of credit to some vulnerable communities too high? What would be the best way to influence the supply and level of credit in these communities? Or, indeed, should government set out to influence this?
• Should interest rates of, for example, 4,000 per cent per annum be allowed (bearing in mind that an annual rate can be misleading for a loan with a term shorter than a year)? Or should interest rates be capped? Would capping interest rates restrict the supply of credit (including to people who can afford to borrow) and risk other charges or fees going up to compensate?
• How should financial products, lenders and debt management companies be regulated? Are current regulations sufficient, and is the only problem one of enforcement? What role should financial services (e.g., self-regulation through voluntary codes and kite marks) and employers play in improving standards and helping people make the right choices? How can confidence in financial services as a whole be improved?
• What should happen when people get into problems? Should the attitude towards debt forgiveness change? How can consumers be directed to the right sorts of advice?

But perhaps the biggest question raised at the event was whether the broader attitude to debt in the UK needs to change. A model of growth driven by consumption funded by household borrowing requires ever increasing capital gains on housing assets or increasing real wages. A “borrow now, pay later” model will always face problems when growth stalls or when the economic environment changes (e.g., when the population ages and dependency ratios increase). The big question is how to ensure sustainable growth in household incomes in the long term – simply borrowing more cannot be the answer.

Reform roundtable seminar on the Universal Credit on Thursday 3 May 2012. Introduced by Andrew Selous MP.

By Patrick Nolan

It is hard to overstate the importance of the Universal Credit. The proposal will directly impact on the lives of millions of the UK’s most vulnerable households and, at a static cost of around £2 billion, have a real impact on the welfare budget. Up to this point much of the focus and debate on this programme has been on broader design issues, such as the impact on incentives to work and poverty, how to treat childcare and housing assistance, and transitional assistance and passported benefits.

Yet with the migration of families to the new system scheduled to begin in October 2013 issues of implementation must come into sharper focus. As Michael Lipsky argued public policies are not just developed in legislatures or the highest levels of the civil service but in crowded offices and daily encounters of “street level” workers. Often the practical challenges of implementation determine the success or otherwise of a programme.

With this in mind Reform held a roundtable event on possible lessons for introducing Universal Credit from similar reforms in the State of Texas. Andrew Selous MP helped set the scene by outlining the Government’s approach to implementing the Universal Credit and a member of the consortia that implemented the Texan project outlined their experiences. The event was held under the Chatham House rule.

Texas set out to create an “integrated eligibility” process for its social services programmes in 2005. The underlying philosophy was similar to the Universal Credit. By combining the application process for a number of programmes decisions could be made in a simpler and quicker way. Yet this ambitious project made a number of early mistakes and the pilot programme was suspended. The contract for the project was withdrawn and one of the members of the original consortia, MAXIMUS, was awarded a modified contract and required to turn the project around. They did this and integrated eligibility has now been implemented across the whole State.

Potential lessons from the Texan experience discussed at the event included:

• Perform a detailed process analysis before selecting the delivery model, training methods, technology and staffing levels. The technology must be designed to support the business process. Robust forecasts of customer volumes and testing of assumptions around the use of different channels are required.
• Have performance metrics and reporting information in place. The right monitoring systems and reports must be developed (this can be surprisingly difficult) and there needs to be strong managerial accountability and legislative oversight. Good governance and transparent processes are essential.
• Focus on operations as well as technology and make sure there is direct communication with operators. There needs to be a strong focus on people operating the system. Communication between front line staff and technology staff must not break down.
• Manage change efficiently within the delivery organisations. Training and onsite support is important and once people began to use the new system in Texas they were required to stick with it, rather than returning to the old.
• Do not promise savings or change until the proof of concept has delivered reliable metrics. Savings promised often depend on the programme being delivered successfully; if delivery is not successful then savings may not eventuate. As well as the benefits of automation, there may be costs associated with the loss of “face time.”

Addressing the issues above would be a challenge even in the best of times. Yet the current environment poses extra difficulty. The Universal Credit must be delivered in a period when public money is tight, other important welfare reforms are taking place and concern is being expressed over labour market outcomes. The timeframe for the implementation of the Universal Credit is very tight and the Public Accounts Committee has already expressed concern over the “oversight of the interaction of benefits that are based on means-testing.”

Yet the lunch also highlighted the broad support for the goals and objectives of the Universal Credit. The policy window is open. A simpler system that works better for recipients is a valuable prize. This makes a focus on delivery issues all the more important. The Universal Credit will not work unless the delivery is right, and this requires a constructive and honest debate on the challenges of implementation.

Reform roundtable seminar introduced by John Whiting, Tax Director, Office of Tax Simplification, on Monday 6 February.