Dr Patrick Nolan is Chief Economist of Reform.
In six days George Osborne will release the coalition’s Emergency Budget. As an early contribution to the debate on this Budget, today Reform released its own Budget for the UK, Taking the tough choices. Two key questions that the Reform Budget raises for the coalition efforts are whether they will be ambitious enough in their timeframe for reducing the deficit and whether they can credibly claim to be restoring the public finances while refusing to cut the largest spending areas.
The coalition Budget will be likely to set out a plan to eliminate the bulk of the structural deficit in the term of this Parliament. Yet a target along these lines will not be ambitious enough. It will mean that the UK will only take half measures to face up to its deficit and problems with debt. The target should be to completely eliminate the deficit and return spending to 36 per cent of GDP within a term.
Moving slowly makes fiscal consolidation harder. The choice is some pain now or greater pain in the future. Unless reform to programmes and entitlements begin in next week’s Budget then the growing costs in areas like health and pensions will swamp any savings identified. The Office for Budget Responsibility has already noted that the cost of public sector pensions will increase by around £5 billion by the end of this Parliament, but even this will be dwarfed by the growing costs of pension and health entitlements more generally. The costs of benefits to pensioners alone will have grown by £12 billion by the end of this Parliament.
Countries that have successfully reformed their public finances moved quickly. In New Zealand in the 1990s the government went from a large deficit to running surpluses in 3 years and in Canada in the 1990s the process took 4 years. This meant that these governments stopped accumulating debt and were able to begin the task of repaying debt sooner. Indeed, as Rt Hon Paul Martin, former Canadian Finance Minister and Prime Minister, noted in a foreword that he wrote for the Reform budget: “because the cuts were sharp and deep they worked – the vicious circle turned virtuous and the positive payback was not long in coming.”
International experience also highlights that fiscal consolidation should occur over as broad a base as possible. No areas of spending should be off limits. Groups who argue for cuts in other areas while trying to protect their own patch fail to grasp the scale of the problem. The hole in the public finances is so deep that every cut in spending that can be made should be made. Further, areas that account for the greatest shares of government spending, and in which spending performs most poorly, should bear the largest cuts. This includes spending on health and middle class welfare, like the Winter Fuel Allowance and the Child Benefit.
As Hon Ruth Richardson, a former New Zealand Minister of Finance, who also contributed a foreword to the Reform Budget, said: “Imposing a lid on increases in public spending, eliminating waste, and salami slicing existing budgets tend to be the politicians’ stock answer, but none of these approaches go to the heart of the problem. The problem is systemic.” The systemic nature of the problem means that the real drivers of government spending need to be addressed. This will require taking some tough choices, such as cutting the healthcare, schools and police budgets, means-testing the Child Benefit and abolishing other benefits such as the Winter Fuel Allowance, and increasing VAT on food and children’s clothing.
