Hearing 2

Fabian Society Commission on Future Spending Choices

Hearing 2: ‘Scenarios and pressures for public spending’

11th December 2012

Witnesses

  • Paul Johnson (IFS)
  • Jonathan Portes (NIESR)
  • Kayte Lawton (IPPR)

Key Questions

  • What immediate choices does the fiscal context impose on public spending?
  • What are the different medium-term scenarios in which departmental choices might occur?
  • What implications do long-term spending pressures have for decisions between 2015 and 2020?

Summary

The hearing opened with a presentation by Kayte Lawton addressing the long term challenges facing public spending in the UK. Outlining the context to the recommendations that followed, Lawton said that while it is not the case that historically spending has been on a permanently upward trend, the composition of spending has changed over time towards social spending. The rise in healthcare spending is one example and if policy remains unchanged it is due to consume around 9 per cent of GDP in 50 years time.

The presentation questioned many of the common assumptions about the factors driving this increase. Unlike some other European states the UK’s age structure is already mature and older cohorts do not exert disproportionate pressure on the healthcare system until near death.

Therefore instead of facing a crisis, the British welfare state and particularly healthcare face challenges that can be managed and problems that can be mitigated with changes to policy and provision upstream. Indeed, as Jonathan Portes would also stress later in the hearing, that affluent nations should increase spending on services such as healthcare is a natural outcome of the fact that these services are superior goods for which demand rises faster than incomes. Historically, as nations get richer they spend more on healthcare.

These remarks on the long term challenges to the public finances were concluded with thoughts on the policy changes and factors that might mitigate increased future demand, in particular the impact of net migration and fertility rates.

While the fiscal gap associated with increased spending due to demographic trends is not insurmountable, Lawton did argue that the UK required a democratic conversation about how to determine long term strategic priorities. While it was noted that the UK can look to the Nordic countries for guidance in tying public spending to social objectives, much more independent thinking is required to establish the fiscal frameworks that are necessary for this to happen in a coherent and sustainable way.

These latter themes informed the two following presentations by Paul Johnson and Jonathan Portes. Focusing predominantly on the impact of the Autumn Statement, Johnson began by highlighting the larger scale of spending cuts required by the rise in borrowing at the time of this year’s pre-budget report to around £129bn.

Johnson added that only around 15 per cent of the government’s planned consolidation up to 2017/18 is through tax rises and these have largely been implemented. So the fiscal tightening over the next five years will be made almost entirely through spending cuts.

Johnson showed how without tax increases or welfare cuts and assuming the NHS, schools and aid spending remains protected then remaining areas of departmental expenditure limits will have to face cumulative cuts of 31.5% from 2010-11.

Jonathan Portes began his presentation by providing some macro-economic context to the government fiscal decisions outlined in Paul Johnson’s presentation. In relation to the short term spending context, Portes argued that while the fiscal hole exists because of the crisis it has been made worse by economic policy since. Contrasting the current government’s approach with the one taken during the early 1990s, he argued that a focus a stimulating a private sector-led above-trend growth would remove many of the problems that currently beset the UK economy.

Moving on to the conditions of uncertainty under which economic decision making takes place, Portes also highlighted the wide divergence of opinion regarding the size of the ‘output gap’ (the difference between today’s economic output and ‘trend’ output). This variable determines how much of the budget deficit is structural and how much is cyclical, or will be removed when the economy returns to growth, and hence how much permanent fiscal tightening is required. Portes suggested the fiscal arithmetic would look more positive if the output gap was larger than the OBR’s estimate, a view he subscribed to.

Moving onto the long term he agreed with Lawton that there is nothing unsustainable about changes in population and demography. Rather, the most difficult choices will be political ones about the trade-offs involved in indentifying the UK’s long term priorities. It was suggested that a key priority was the cultural shift towards encouraging people to remain in employment after the current state pension age.

Related to the immediate challenge of paying for increased demand on services, all speakers agreed that more credibility and transparency in long term planning was required. Discussion turned to the institutional structures that might support this, with Jonathan Portes expressing sympathy for a system whereby political parties are obliged to present long term plans to independent assessment. This would allow voters to make informed choices.

For an overview of the issues that will be discussed during this hearing, please see Andrew Harrop’s article on ageing and long-term public finances on Fabian Review online.

Downloads

Paul Johnson’s submission to the hearing (download)

Kayte Lawson’s submission to the hearing (download)

Background paper (download)