Patrick Nolan: Making the case for cuts in the regions

Patrick Nolan is Chief Economist at Reform

The effect of fiscal consolidation in the regions was the subject of BBC research released yesterday. This survey of 76 per cent of councils in England showed that the funding of social care is a major area where changes in spending will be felt, although there is a North-South divide to this with spending falling by about 4.7 per cent in the North in 2011-12 and rising by 2.7 per cent in the South. Yesterday I spent a few hours being interviewed by nine regional radio stations to discuss this research and the Coalition’s overall approach to fiscal consolidation. Some of the key points that came up in these interviews are discussed below.

Overall these interviews highlighted a number of challenges in communicating the case for consolidation. There is a perception that the cuts are happening faster than is actually the case. Even this morning this mistake was repeated in coverage of IMF research that claims cuts are being ‘front loaded,’ when in reality most of the consolidation is still to take place. Many people still do not grasp the scale of the changes that are yet to come if the Coalition is to achieve its Budget targets.

These interviews also highlighted how inconsistencies can undermine support for change. By protecting some areas of poor value for money spending, such as the Winter Fuel Allowance, principles such as cutting where value for money is lowest have not been consistently applied. This leads to the question of whether specific parts of the population are being picked on while others escape change. This inconsistency undermines the case for consolidation and makes it more, not less, difficult to generate support.

The first question, asked by Phil Gayle on BBC Radio Oxford, was why the cuts were necessary. I noted that the Government needs to get on top of the deficit to help the economy grow faster. Failing to do so would mean that the UK would be seen to be a more risky place to lend to, which would mean that it would be harder for businesses to borrow and they would not be able to expand and create new jobs.

There is also a question, raised by Andy Harper of Radio Cambridgeshire, of whether the timing of the consolidation is right. The Coalition is right to move quickly and it should be borne in mind that, as the Budget documents (table 1.1) show, most of the cuts will come into effect in the later years of this Parliament when the economy will be stronger. Consolidation also needs to be put into its public finance context with the Coalition plans differing little from those of Alistair Darling before the election and government spending only returning to 2007 levels.

Jonathan Cowap on BBC Radio York asked about the causes of the crisis. There is a widely held view that the crisis was solely caused by ‘bad banking’ and that other areas are now having to pay to clear up their mess. Yet that this view is widely held does not make it any less wrong. The reality is much more complex. While the Global Financial Crisis (GFC) clearly played a part in the deficit, the larger factor was the increase in government spending (much of which was low value for money) since 1997. The reality is that the UK went into the GFC in a particularly vulnerable position with the Government running deficits even when times were good.

As well as the problems caused by spending getting out of control, on BBC Wiltshire Mark O’Donnell and I discussed the role of private providers in the provision of public services. Properly regulated, private sector provision of services can play an important part in improving value of money and outcomes. A major reason for this is that private sector providers tend to be more focussed on doing what is in the interests of their users, rather than satisfying the desires of distant politicians based in London.

On BBC Coventry and Warwickshire Annie Othen asked about the effect of spending cuts on the ‘North-South Divide.’ Councils in the North of England face particular challenges from cuts as they are more reliant on government spending to begin with. But, I argued, this is not a reason for not cutting. The key is to ensure that the right spending is cut in the right way and that thought is given to how these areas can make the transition to economies less reliant on government funding. The best future for these regions will be one that does not involve such a heavy dependence on government spending.

Changes in council spending on adult social care show the implications of ring fencing for non-protected areas of spending. As Neil Green and I discussed on BBC Tees adult social care is the largest area of non- ring fenced council spending and so it is not surprising that councils have turned to it as a major area for savings. This is, however, only one part of the equation. As I noted in my interview with Tony Fischer on BBC Hereford and Worcester these changes need to be seen in the broader context of the need to change the overall approach to funding social care. As well as the levels of state funding, expanding the funding base through greater use of co-payments and user charges must be given consideration.

Expanding the funding base for public services is important because, as Martin Bailie and I discussed on BBC Cornwall, the challenge is to not just eliminate the deficit but to also address the costs of an ageing population. Population ageing means that programmes that are already unaffordable will simply become more so and alternatives to government funding for services must be developed.

On BBC WM Ed Doolan asked whether fiscal consolidation can be popular. There is no doubt that fiscal consolidation is a hard sell. But, I noted, surveys have shown that there is support for changes such as asking people to make a greater contribution to their own costs of care. Support for consolidation can be built if the right cuts are made in the right way, if people understand why the changes are taking place and if people understand what the logic behind the approaches is. Political support for ideas is never fixed and leadership requires creating support not just reflecting it.