Written evidence submitted by Reform
Thank you for your letter dated 22 October in
which you invited Reform to submit written evidence to
an urgent inquiry on the Spending Review by the Treasury Committee.
Your letter highlighted three questions of particular interest.
These are:
— The manner in which the Spending Review
was conducted and, in particular, the decision-making process.
— The decision to ring-fence and partially
ring-fence particular areas of public spending.
— The impact of the Spending Review on
the long-term growth potential of the UK economy.
This letter gives Reform's full response
but in summary:
— The Government did not go anywhere near
far enough to engage the public in the Review and to spark a frank
debate about the future of public spending. The comparison with
Canada is instructive.
— The decision to ring-fence budgets is
a mistake. It sends a message to public service managers that
they are protected from the need to reform and deliver efficiency.
In fact there is very strong evidence of inefficiency in, for
example, the NHS and the schools budgets.
— The elimination of the deficit within
one Parliament will have very positive impacts on the long-term
growth potential of the UK economy. Without the elimination of
the deficit, growth will be undermined because rising public debt
and rising interest payments will drive up taxes.
This letter discusses each of these questions in
turn. Background material outlining Reform's work on the
Spending Review is also included as an attachment to this letter.
This background material includes:
— Reform's alternative Emergency
Budget, titled Budget 2010: Taking the Tough Choices.[12]
This Budget contains forewords by Rt Hon Paul Martin, former Canadian
Minister of Finance and Prime Minister, and Hon Ruth Richardson,
former New Zealand Finance Minister.
— A copy of the transcripts from Reform's
four post-election conferences on welfare, education, public services
and the deficit and health.[13]
These transcripts, the Reform commentary on the Coalition's
first hundred days and a summary of the transcripts are contained
in the document titled The First Hundred Days.
— A copy of the notes from a public lecture
given by Hon Ruth Richardson, former New Zealand Minister of Finance,
on her experience with fiscal consolidation in New Zealand and
lessons for the United Kingdom.
— A collection of blog posts written by
Reform authors and posted on the Spectator Coffeehouse
website in the document titled Your Guide to the Spending Review.
— A copy of Reform's recent welfare
report, The Money-Go-Round, which outlines how money could
be saved in the government's largest budget and which includes
a discussion on the interaction between spending on transfers
(AME) and Departmental Spending Limits.
— A copy of the PowerPoint slides of a
public presentation (on 13 October so prior to the Spending Review
announcements) given by Reform staff on what the Spending
Review should contain.
The manner in which the Spending Review was conducted
and, in particular, the decision-making process
Reform supports the Government's initiative
in aiming to conduct the Spending Review in a collaborative manner,
with a period of engagement with the public, the public sector
and policy experts over the summer. However, Reform believes
that this process did not go far enough in engaging the public
and sparking honest debate about the magnitude and general nature
of the budget actions that are needed.
A contrast can be made with the reforms in Canada
in the 1990s. As Rt Hon Paul Martin noted in his foreword to the
Reform alternative Budget, when the new government was
elected at the end of November 1993 Canada's deficit and debt-to-GDP
ratios were, with the sole exception of Italy, by far the worst
of the G7. In 1998, the deficit had been eliminated and the debt
ratio was dropping.
The approach taken to engaging the Canadian
public in the development of this consolidation (particularly
the 1995 Budget) has been outlined by Rt Hon Paul Martin.[14]
He highlighted that an open budget process should engage the public
(experts, interest groups and average citizens) in dialogue on
"the adequacy of our targets, the prudence of our assumptions,
and the potential fiscal measures themselves."
In Canada this included a consultation process
that began more than four months before Budget day and included
the release of major background papers and public hearings by
the Finance Committee of the House of Commons. This stimulated
an outpouring of detailed mock budgets by various interest groups,
media columnists and individual citizens. It is Rt Hon Paul Martin's
view that this consultation "contributed importantly to creating
reasonable expectations as to the magnitude and general nature
of the budget actions that were needed."
Reform set out to spark honest debate
about the budget actions needed through team members' attendance
at Spending Review events organized by the BBC and others in London,
Norwich, West Bromwich and Ipswich. Reform also held an
independent event in Staffordshire titled Can Cannock Cope?
Showcasing local champions and public sector reform in Cannock
Chase. This discussion on public services and the economy
included the leaders of public services and businesses and an
audience of 100 people.[15]
A key finding from the Cannock Chase event was
that local people were not fully aware of the difficult decisions
that lay ahead and that local leaders (while being optimistic
that the necessary savings could be achieved) had not sufficiently
considered where savings should be made aside from obvious efficiency
gains. The Reform event was the first time that many of
the local leaders had met each other and thus provided a starting
point for dialogue. Reform's view is that events along
these lines should have been undertaken much more widely.
The decision to ring-fence and partially ring-fence
particular areas of public spending
This decision is a mistake at a number of levels.
Above all it sends a message to the decision-makers
in health, schools and the other ring-fenced budgets that they
are insulated from the need to deliver reform and efficiency.
This is tragic in the light of the evidence of inefficiency in
these budgets, brought forward by the Audit Commission, the National
Audit Office and Reform amongst others. Conversely the
greatest reform energy in the current Government lies in policing
where the pressure for lower spending has been amongst the greatest.
Ring-fencing violates the principle that changes
in the Budget should reflect the performance (or value) of the
spending in different areas. Low value spending should be cut
first—no matter what budget it falls within. Otherwise more
valuable spending will be sacrificed to protect less valuable
spending.
To give just one example. Cutting an extra pound
of spending from, say, community services to protect a pound of
spending on health will only maximise the national interest if
the pound of health spending provides greater value than the pound
of spending on community services. It is highly debatable that
this is true for every single pound of health spending.
Health is the major departmental budget that
has been ring-fenced. However, this budget absorbed 40% of the
increase in inputs across the whole public sector between 1997
and 2007. This service has also performed poorly in terms of productivity[16]
and has not provided the improvement in clinical outcomes that
should have been hoped for.
Lastly, by ring-fencing areas of spending the
government fails to take a consistent approach to consolidation.
This lack of consistency encourages groups to lobby for exemptions.
The Government will find it hard to justify its reductions in
Child Benefits and other benefits, for example, while it is protecting
the universal benefits for wealthy pensioners such as the Winter
Fuel Allowance.[17]
The impact of the Spending Review on the long-term
growth potential of the UK economy
Reform believes that the Government is
correct to set out a target for reducing the deficit in one parliamentary
term. Both Canada and New Zealand in the 1990s turned around their
deficits within one term. In the Emergency Budget the Coalition
won fiscal credibility (and breathing space from international
financial markets) by setting a similar goal. Failing to now follow
through on this goal would damage the government's credibility
and reputation in the eyes of international markets.
There is, not unsurprisingly, debate on the
likely economic effects of a fiscal consolidation. These debates
are unlikely to be quickly resolved. But we can say six things
securely, based on our work over the last several years:
1. consolidation has worked for countries
in similar circumstances. We have discussed the results of consolidation
with figures from countries like Canada and New Zealand. Ireland
is sometimes used as a case against consolidation but the view
of Colm McCarthy, Chair of the Irish Special Group on Public Service
Numbers and Expenditure,[18]
is that while the Irish economy is going through a hard time things
would have been even harder if they had not have taken their recent
actions (as the cost of financing their deficit would have been
higher). Problems with the Irish economy stem from a public finance
system that was too pro-cyclical and from not having an independent
currency. The problem is not consolidation.
2. Second, the UK went into the global financial
crisis in a weak position, compared to not only Europe but also
the rest of the world. The Government was running deficits even
when the economy was experiencing strong growth. Household savings
rates were low.
3. The comparisons with debt levels following
World War Two are anachronistic given the very different age profile
of the population then and now. High debt levels and an expensive
welfare state may have been affordable (although perhaps not wise)
when the working age population was young and growing but in the
face of an ageing population this is not the case.
4. There are strong arguments for moving
quickly. The costs of government entitlements in health and pensions
are rising. The longer policy makers wait to reform these systems
the higher the costs of change will be.
5. The consolidation process, run properly,
should encourage policy makers to focus on the quality of public
spending rather than just the quantity.
6. By reducing the need for tax increases,
consolidation will improve the business environment which is crucial
for growth. Encouraging private sector growth is an important
route to reducing the output gap. Economic research on the Great
Depression, for example, highlights that rather than purely being
a failure in markets, policies that reduced competition and labour
market flexibility made the Depression longer and more severe.
Similar arguments have been made in relation to Japan's lost decade
of economic growth.
November 2010
12 This alternative Budget outlines Reform's recommended
targets and timeframe for eliminating the deficit, broad analysis
of the economic and fiscal strategy that should underline government
intervention in different policy areas, proposed measures to eliminate
the deficit and an assessment of the effect of these measures
on the government's fiscal aggregates. Back
13
Speakers at these conferences included (in speaking order) Rt
Hon Iain Duncan Smith MP, Douglas Carswell MP, Steve Webb MP,
Rt Hon Yvette Cooper MP, Rt Hon Lord Knight of Weymouth, Nick
Gibb MP, Rt Hon Francis Maude MP, Bernard Jenkin MP, Rt Hon Margaret
Hodge MBE MP, Hon Sir Roger Douglas MP, Cllr Colin Barrow CBE,
Dr Phillip Lee MP, Simon Burns MP, Rt Hon Stephen Dorrell MP and
Rt Hon Lord Warner of Brockley. Back
14
Martin, P. (1996), `The Canadian Experience in Reducing Budget
Deficits and Debt,' Economic Review, Federal Reserve Bank of Kansas
City, p. 22. Back
15
Local leaders who attended were Philip Atkins, Leader, Staffordshire
County Council; Aidan Burley MP, MP for Cannock Chase; Sheila
Brown OBE, Founder, Newlife Foundation for Disabled Children;
Stephen Brown, CEO of Cannock Chase District Council; Mark Ellse,
Principal, Chase Academy; Dr Lynne Hulme, Cannock Chase Consortium
Commission; Douglas Paxton, Deputy Chief Constable of Staffordshire
Police; Stuart Poynor, CEO, South Staffordshire Primary Care Trust;
and CF Pritchard, Director, Pritchard & Associations Ltd. Back
16
The Office of National Statistics' analysis of productivity has
shown that public sector productivity has declined on average
0.3% a year between 1997 and 2007. Private sector productivity,
in contrast, rose 22.8% over the same period. These averages across
sectors hide the relatively performance of spending in different
areas-and in this respect health spending has performed particularly
poorly. The NHS has lagged behind the rest of the public sector
for delivering value for money. Back
17
Close to 90% of spending on the Winter Fuel Allowance goes to
people who are not in fuel poverty. Back
18
See the transcript of Colm McCarthy's comments to a Reform conference
on public services and the deficit on p 126 of The First Hundred
Days. Back
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