Magazine article Public Finance

Uncomfortable Truths

Magazine article Public Finance

Uncomfortable Truths

Article excerpt

to hear people talk at the party conferences, at which CIPFA has been running lively fringe meetings on devolution and growth, many assume the proposed elimination of the budget deficit around 2 019 will mark a return to 'politics as usual'. But the reality of long-term financial projections is that policymakers, politicians and voters need to face up to profound choices. While the government and political parties appear to have accepted the need to eliminate the budget deficit, they are still not facing up to the urgent need for further reform to sustain public finances over the coming decades. Indeed, they are making further fiscal commitments which we ultimately cannot afford.

Fiscal consolidation - cutting the deficit - was the inevitable consequence of the collapse in tax receipts triggered by the 2008 recessioa However, by the end of 2013/14 just 46% of the government's consolidation plan had been achieved. During the next parliament, people will be seeing economic growth alongside substantial, sustained cuts in services. Historically, services have been cut during the bad times; such big reductions at a time of growth are unprecedented.

The government has added to the scale of the task by introducing high-cost plans, such as tax-free childcare and the Dilnot reforms to social care funding, for which there will have to be yet more cuts elsewhere to fund them.

None of these figures allow for potential future shocks, such as an exit from the EU, energy security problems, cyber risks or further global economic failures.

As the Office for Budget Responsibility observes, it is the ageing of the population that has the greatest impact on the future of public finances. The ONS estimates that the proportion of the population aged 65 and over will increase from 17.6% in 2014 to 27.1% in 2064. During that time the proportion aged 16 to 64 is forecast to fall from 63.6% to 55.7%.

Notwithstanding longer working lives, the economically active population will inevitably become proportionally smaller, and at the same time it will need to be even more productive to support the burgeoning generations of older people. Putting aside today's emotionally charged debates on the issue, there is no getting away from the fact that future governments will need to give much more sober and serious consideration to the types and levels of immigration that Britain needs to sustain an economy productive enough to meet the needs of our rapidly ageing population.

Although improved growth prospects and service reforms should help to an extent, the big choices are limited and clear if debt levels are to remain sustainable: either taxes will have to go up, substantial cuts be imposed on budgets such as education, or care and pension levels will need to be cut There are no other options.

Addressingthese challenges will require strongpolitical leadership. However, trust in politicians and public institutions is declining. Accordingto the 2013 British Social Attitudes survey, the proportion of people who trust governments to put the nation's needs above party fell from 38% in 1986 to 18% in 2012. This deficit of trust calls for a new approach to policymaking. It demands greater honesty, both in the UK and internationally, about questions of long-term sustainability, improved transparency of decision-making, stronger governance and financial management, and intolerance of costly failures to deliver public services and value for money.

In CIPFA's manifesto for sustainable public finances, over the next six months leading up to the election we are going to be engaging in the debate on six key points:

1 Governments should budget for the medium to longterm, and invest t strategically to stimulate economic growth

Policies designed simply to win votes in the short term will only damage the public interest by undermining efforts to remove the deficit and reduce debt.

Rising demand from the elderly will make it increasingly difficult to balance their needs against those of other generations, given a largely fixed proportion of national income spent on public services. …

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