www.psrc.pwc.com An analysis of progress and challenges Spending Review: One Year On
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
www.psrc.pwc.com
An analysis of progress and challenges
Spending Review: One Year On
1
Summary 2
A year of austerity 4
The Government’s fiscal plans and 6 the state of the public finances
Fiscal policy options 13
The public’s view 15
Conclusions 21
Contacts 23
Contents
2
Summary
A year ago, the markets were eagerly anticipating the announcement of the Coalition’s first Spending Review settlement, setting out plans for dealing with the deficit and the public sector debt mountain.
Before the Chancellor’s announcement, we assessed the impact of the fiscal squeeze on output and jobs in private sector industries and different regions1, which we subsequently updated after the announcement2. Our estimates were a reality check:
• Around435,000privatesectorjoblossesby2014/15inadditiontotheloss of public sector jobs (then estimatedbyOBRat490,000but later revised down to around 400,000by2015/16).
• Thehardesthitregionswere expected to be Northern Ireland, Scotland, Wales and the North East of England (in terms of job losses as a percentage of total employment intheseregions).
• Thekeysectorsworstaffectedby the cuts were expected to be construction and business services.
1 ‘Sectoral and regional impact of the fiscal squeeze’,PSRC2010. 2 PwCUKEconomicOutlook,November2010.
2
3
One year on, we take a look back and assess what has happened by reviewing:
• Thekeyeconomicdevelopmentstodate, including growth prospects for the global and UK economies, the key tax and spend changes in the last year and the outlook for the underlying fiscal position.
• Thekeyimpactsofpublicspendingcuts on the labour market for both public and private sector employment (by sector and region as well as in particularagegroups).
• ThefiscalpolicyoptionsthattheChancellor may consider as he prepares his Autumn Statement on 29November.
• Theviewsofthepubliconhowtheprinciples underpinning the Spending Review – of Reform, Growth and Fairness – are being achieved, and the particular challenges that lie ahead for growth and public service reform.
We conclude that there is a persistent feeling amongst the public of uncertainty around the future and an expectation that the worst is still to come, particularly as public sector recession hampers the recovery of the labour market and with continuing global volatility.Thegoodnewsisthat,asweexpected, there have been private sector employment job gains which had more than offset public sector losses over the 18monthstoJune2011,althoughthegains were most evident for part-time jobs. However, in the second quarter of 2011,whenthepublicspendingcutsstarted in earnest, this pattern was reversed – with public sector job losses overtaking private sector job gains. Theconstructionsectorhasbeenhardhit(asweanticipatedlastyear)whilstthe growth in business services overall suggests that the opportunities we foresaw last year for some sub-sectors like outsourcing may have outweighed the losses in other areas.
Public sector job losses appear to have been more front-end loaded than expected, with particularly severe losses early on in local government, whilst the regional impact so far has been more varied than we originally expected. Although the Chancellor’s room for manoeuvre is limited, our analysis indicates that there are options to fine-tune the pace of the fiscal squeeze, but these are not easy or costless. Some re-phasing of capital spending cuts is the most attractive of the options available.
3
4
A year of austerity3
Conditions in the global economy have been very challenging in the year since theSpendingReview.Thepaceofrecovery has slowed considerably in Europe and the US in part due to the earthquake in Japan, unrest in the Middle East and oil price shocks. ThespectreofsovereigndebtdefaultinGreece(andpossiblyalsoothercountries)continues to hang over the Eurozone. Combined with the simultaneous pursuit of fiscal austerity by European countries and now the US, this has sapped confidence and demand in the UK economy as well in recent months.
ThestronggrowthoftheBRICshasprovided a more positive story for the world economy. However, as the UK trades mainly with the US and Eurozone, it has benefited less from strong growth in the BRICs, which account for only around 7% of total UK exports (even including Hong Kong within the figuresforChina).
OverthethreequarterstoQ22011, GDP growth in the UK has been minimal, averaginglessthan0.1%perquarterover this period. Indeed, our main scenario is for continued slow and uneven growth but the risks are heavily weighted to the downside, with a significant chance of a double dip recession.TheUK’sexport-ledrecoveryis facing strong headwinds as its major trading partners in Europe and the US slow down. UK consumers and businesses lack the confidence to spend4 and have been hit by rising global commodity prices for energy, food and other imported goods. At the same time, public spending cuts have begun to bite in earnest since April.
Turningtojobs,theemploymentrateinthe UK had been relatively strong until recently, but then declined in the second quarterof2011whenpublicsectorjoblossesof111,000outweighedprivatesectorjobgainsofaround41,000.Publicsector job losses have now totalled around290,000sinceDecember2009with local government bearing the brunt ofthesecutswitharound163,000joblosses over this period. But all parts of the public sector have seen net job losses, including the NHS and education.
3 Werestrictourselvesinthispapertoashortoverview of key macroeconomic trends and prospects. We will review these topics in much more detail in our next UK Economic Outlook report,whichwillbepublishedinNovember2011.
4 Businesseshavegenerallyseenprofitabilityandcash flow recover since the recession, but so far this has not translated into a large increase in UK business investment, which fell very sharply during the recession.
5
On the other hand, net private sector job gainstotalledaround600,000betweenDecember2009andJune2011,sonetemployment gains have been significant over this 18 month period (see Figure 1).
It should, however, be noted in respect of this and subsequent data from the Labour ForceSurvey(LFS)thatthejobgainshave been disproportionately in part-time employment, with average hours worked in the economy having decreased to just 31.2hoursperweekinQ22011,whichisthe lowest level since the series began in 1995.Itshouldthereforebeborneinmind that trends in full-time equivalent employment have been less favourable during the last couple of years than suggested by total employment numbers.
It is only in the last three months between March2011andJune2011thatpublicsector job losses have outweighed private sector job gains. Since this quarter also marks the start of the main phase of the public spending cuts, however, it is clearly a concern that this negative trend in overall UK employment could continue for some time, so pushing unemployment up further.Thiswouldfurtherundermineconsumer confidence and spending, which have already been weak over the past year due to the severe squeeze on household realdisposableincomesin2010-11.
Across the regions of the UK, the labour marketpicturevariesconsiderably.Thedevolved administrations have fared relatively well so far, at least according to theLabourForceSurvey.ThisistheONS’preferred measure albeit alternative measures of change in employment would not be as optimistic; the Quarterly Employment Survey implies that total employment declined by 1% in Northern Irelandduring2010-115.TheNorthEastand West Midlands have suffered the most over this period, experiencing the largest declines in their employment rates (see Figure 2)whilstalsobeingamongstthe regions with the lowest employment rates to start with in this period.
5 TheLabourForceSurveyisasmall,samplesurveyand therefore for some of the smaller UK regions the estimates are subject to appreciable sampling variability. For example, for Northern Ireland, the estimated change in employment rate is 0.8percentagepoints(asinFigure2)butwecanexpectwith95%confidencethetruevalueofchange in Northern Ireland’s employment rate lies betweenplusorminus2.3percentagepoints.
Mar 08-Dec 09
Public Private Total
5.7%
-4.6%
-4.4%
-2.3%
2.7%
Source: ONS Labour Force Survey
1.1%
Dec 09-Jun 11
800
600
400
200
0
-200
-400
-600
-800
-1000
-1200
Figure 1: Trends in public and private sector employment during and since the recession (000s)
Source: ONS Labour Force Survey
Figure 2: Change in total employment (as % 16-64 year olds) in year to Q2 2011
East
Scotland
N. Ireland
East Mids
Wales
London
UK
South East
England
North West
Yorks & Humber
South West
West Mids
North East
-2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50
6
TheCoalition’s2010BudgetandSpending Review plans were based on a commitment to eliminate the structuralcurrentbudgetdeficitby2015.Theplansfocusedprimarilyonspendingalthough there were also some tax increasesannouncedintheJune2010budget,mostnotablyincreasingVATto20%,aswellassomeotherincreasesinincome tax for higher earners and national insurance contributions for most workers that were inherited from the previous Government.
In total, the Government committed to £81bnofpublicspendingcutsby2015,including£46bnofcutstodepartmentalrunning costs with the remainder mostly being made up through welfare reforms aimed at cutting bills for social security benefits and tax credits (see Table 1 for moredetailsoftheSpendingReview).Thesecutshavenowbeguninearnest:for example, total public net investment in the first five months of this fiscal year was16%lowerthanin2010/11.
However, cumulative borrowing over the current2011/12financialyearissofarfollowing broadly the same path as last year and may struggle to achieve the OBR forecast that borrowing will fall to £122 bn this year (see Figure 3).
The Government’s fiscal plans and the state of the public finances
160
140
120
100
80
60
40
20
0
£ billion
2010/11 Outturn
2011/12 Outturn
OBR forecast 2010/11
OBR forecast 2011/12
Ap
r
May
Jun
Jul
Aug
Sep Oct
Nov
Dec Jan
Feb
Mar
Figure 3: Cumulative Public Sector Net Borrowing (PSNB)
7
Public spending has been broadly on track, but tax revenues have been somewhat lower than forecast, although not to a dramatic degree, bearing in mind that GDP growth so far this year has also been significantly slower than the OBR forecast in March.
Any public borrowing overshoot this year is likely to be largely due to slower than expected output and employment growth, which means lower than expected revenues and a higher social security benefit burden than forecast. However, such factors are ‘automatic stabilisers’ that need not be a concern for achieving the structural deficit target so long as they are only due to a temporary cyclicalslowdown.Theassessmentofachievement of reductions in the structural deficit depends on the view taken on trend growth and the output gap.TheOBRbelievesthattheGovernment will meet its target on the current path. However, estimates of the output gap vary widely, which makes it difficult to properly assess performance against the target.
Public spending cuts reduce employment both directly, as public sector jobs are cut, but also indirectly in the private sector, given that government is a big customerinmanysectors.Theyalso have distributional consequences across regions, ages and sectors. However, a reduction in government spending may also have a positive impact on the private sector in some areas as it reduces ‘crowding out’, meaning that businesses do not have to compete so hard with the public sector for workers and other resources including finance.
Measures
Local and Regional Government
• Annual grant to the Scottish Parliament to be cutby6.8%by2014/15
• Annual grant to the Welsh Assembly to be cutby7.5%by2014/15
• Annual grant to the Northern Irish Assembly tobecutby6.9%by2014/15
• 7.1% cut in annual funding for local government
Employment Benefits
• Benefits reformed to save £7bn• Employment Support Allowance restricted to
12 months for some categories of claimants• Eligibility for threshold for single people living
on housing benefit raised• Extra75,000apprenticeshipsfunded
Education • Schools funding to increase in real terms, butcapitalspendingtobecutby60%after2014
Policing and Justice
• Departmentalcutof25%fortheHomeOffice• 20%cuttopolicefunding• 20%cutstoprisonandprobationstaff• Legal aid scrapped in many areas• Prison building and maintenance budget
reducedby50%
Housing • Affordablehousingbudgetreducedby60%• Counciltenantstopayupto80%ofmarketrates
Whitehall • 33%cutinadministrativecosts• Cutsacrossalldepartments,averaging19%• Reform of public sector pensions
Pensions • Stateretirementagewillriseto66by2020
Defence • Defencebudgetcutby8%over4years
Science • Budget to be frozen
Transport • Ticketpricestoincreaseby3pptsafter2012
Table 1: Key points of the Spending Review
8
Ultimately this reduces the cost of these inputs for business (including the interestrateinthecaseoffinance)andpromotes expansion. However, at a time with substantial spare capacity in the economy, these impacts are likely to be smaller than if the economy was growing more strongly.
UK employment by sector
As noted above, the UK has been losing jobs in the public sector, but gaining them in the private sector (albeit disproportionately in part-time rather thanfull-timejobs).Figure 4 shows that the employment changes have varied considerablyacrosssectors.Thebiggestgains in jobs have come in business service related activities (information and communication industries and professional, scientific and technical activities)andinhumanhealth,socialwork, accommodation and food service activities.Thebiggestlosseshavecomefrom sectors with traditionally high levels of employment and funding from the public sector (administration and defence, construction and education)withtheexceptionofthehealth sector, which has seen increases in jobs. Going forward, we expect those sectors with strong public dependency to continue to suffer.
Source: Workforce jobs
Figure 4: Trends in employment by industry sector change in year to Q2 2011 (000s)
-120 -100 -80 -60 -40 -20 0 20 40 60 80
Information & communication
Human health & social work activities
Accommodation & food service activities
Professional scientific & technical activities
Arts, entertainment & recreation
Transport & storage
Water supply, sewerage
Other service activities
Wholesale & retail trade
Financial & insurance activities
Mining & quarrying
Electricity, gas, steam & air conditioning supply
Administrative & support service activities
Manufacturing
Agriculture, forestry & fishing
Real estate activities
All jobs
Education
Construction
Public admin & defence
9
InAugust2011,PwCconductedanonline survey of Local Authority Chief Executives to explore how councils havecopedwithfundingcuts.Theresearch examined where councils have generated immediate cost savings, and the actions they have taken as part of their cost reduction programmes. Looking forward to the next few years, we asked how councils will find more savings, and if there would be a radical redesign of services.
Simultaneous with this survey, we conducted a national online poll with 2,013membersofthepublictogatherinformation about their awareness of savings and service reductions made by their councils in the last twelve months.
Lookingbackon2010/11,wefoundthat councils largely secured the savings they set out to make. In doing so, they have encountered challenges broadly inlinewiththeirexpectations.Thefocus in securing the savings to date has been on changing support services or the “back office”, improving service deliveryprocessesand/ormanagementrestructuring.Thefocushasthereforebeen largely around “doing things differently” and more efficiently rather than “doing different things”.
TodatebothMembersandstaffhave,in the main, accepted the savings that councils have implemented.
Where councils have made reductions to frontline services, these have largely been in libraries, youth services, areas of adult social care, highways and groundmaintenance.Therehavebeenrelatively few reductions to date in children’s services.
Theseareasofreductionwerelargelyreflected in our public opinion poll. In no service area did a majority of respondents identify that there had been service reductions. Where people identified reductions, these were largely in relation to the repair of roads and pavements, libraries, leisure and sport, arts and culture, and adult social services. It is possible there is an association between the perception of reductions in the maintenance of roads and pavements and the additional pressuresonlocalauthoritiesin2011as a result of the particularly adverse winter weather conditions.
Many councils have invested financially to make these savings, typically securing a return of between £1 and £10forevery£1invested.
Box 1: ‘How are you doing? One year on from the Spending Review’Public sector employment
Therewere240,000fewerpeopleworking in the public sector in Q2 2011comparedtoQ22010.Centralgovernment including the NHS lost 66,000employees,publiccorporations29,000,butthebiggesttollhasbeeninlocalgovernmentwhichlost145,000employeesintheyeartoQ22011. Box 1 gives more details on how the local authority cuts have been made so far.
If we look at the total job losses since the end of the recession we can see that public administration has seen the greatest number of losses, whilst construction has seen the greatest proportional loss (see Figure 5).TheNHSandeducation,towhich the Government has offered a degree of protection, have nonetheless both lostaround50,000employees.
1009080706050403020100
Armed Forces
Construction Police Other health and social
NHS Education Other public sector
Public admin
Source: ONS, returns from public sector organisationsNote: Other public sector includes publically owned financial institutions
Figure 5: Numbers of public sector jobs lost (000s) and % losses, by sector December 2009 – June 2011
2.5% 12.5%
5.8%5.5%
3.0% 3.2%
7.7%
7.6%
10
Thepublicsectorjoblosseshavecomemuch faster than had been anticipated. Figure 6 shows the OBR projections of job losses compared to actual job losses. After only one quarter of data this financial year the job losses in the public sector have exceeded the OBR forecast for the whole financial year. It does not necessarily follow that the total number of job cuts will therefore be greater than forecast, because in later years it may be that job losses will be lower than forecast. However, earlier than expected job cuts have sapped demand at a time when the economy is already stalling.
Impact on regional employment
Thepublicsectorjoblossesoverthe past year have not fallen evenly across the regions, as illustrated in Figure 7. Thedevolvedadministrationshave been relatively protected so far, whilst the South West and North East have experienced the largest job losses in percentageterms.Thishasbeenparticularly damaging for the North East as it has relatively high proportion of employment in the public sector.
Thedevolvedadministrationshavetraditionally received higher public spending per head than average due to the Barnett formula and this may still be shielding them to some extent. Certainly the planned spending reductions in grants to the Devolved Assemblies are much less severe than the average UK departmental cuts (see Table 1)meaningthatwemaycontinue to see this in the near future.
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,0002010-11 2011-12
(Actual only includes data from Q2 2011)
Cumulative job losses to 2015-16 (Actual only
includes job losses so far)
Source: OBR, ONSNote: Forecast losses for 2010-11 are based on our calculations from OBR June forecast of a 0.1% fall in public sector employment
Figure 6: Public sector job losses: forecast and actual
OBR forecast November 2010
Actual
Source: ONS Labour Force Survey
Figure 7: Change in public sector employment by region in year to 2011 Q2 (%)
-7 -6 -5 -4 -3 -2 -1 0
N. Ireland
East Mids
Wales
Yorks & Humber
West Mids
South East
East
UK
England
Scotland
North West
London
North East
South West
11
However, what we observe may also reflect the fact that job losses have been delayed. In Scotland, for example, the Parliament voted last year to defer some cuts until the following year (although, in practice, the actual percentage change in public sector employment in Scotland intheyearto2011Q2wasthesame astheUKaverage).Wecanthereforeexpect future job losses in these regions as the cuts continue to bite over the next3-4years.
Youth employment particularly hard hit
As shown in Figure 8, reductions in employment have disproportionately affected young public sector workers, following a general pattern we have seen for overall UK employment over the last few years. It is important to note that this age group will be particularly affected by reductionsinrecruitment.As24yearoldsturn25therewillbefewerpeopletoreplace them, as most people enter this employment age group as new recruits. In other age groups some people moving up from other age bands will replace those moving out. However, the impact on young workers will clearly be a concern for the Government given the detrimental effect that a prolonged period of unemployment in early life can have on longer term employability and career prospects. High levels of youth unemployment in an area can also be a factor in wider problems such as increased crime and social unrest.
16-17 18-24 25-34 35-44 45-54 55-64 65+
0.0%
15.7%
25%
-3.4%
-1.8%-1.6%
-12.4%
Source: LFSNote: the Labour Force Survey (LFS) estimates of public sector are based on survey respondents’ views about the organisation for which they work and do not correspond to the National Accounts definition used for official Public Sector Employment estimates.
30,000
20,000
10,000
0
-10,000
-20,000
-30,000
-40,000
-50,000
-60,000
-70,000
Figure 8: Change in number of public sector employees 2010-2011, by age
12
The positive side of the story: continued very low UK interest rates
Thisyearhasseenconsiderable turmoil in the financial markets as stalling growth and uncertainty in Europe and the US has made investors wary. UK stock markets have not been immune to these trends, but UK government bond markets have seen much more favourable trends as indicated by the fact that the cost of borrowing for the UK Government is still very low as measured relative to other governments (see Figure 9).This‘safehaven’ status has been a clear benefit of the UK Government’s relatively tough and credible fiscal consolidation plan.
Keeping fiscal policy tight has also been an important factor in allowing the Bank of England to keep short term interest rates very low and announcing £75bnofadditionalquantitativeeasingafter the MPC meeting in October to help to support the economy. Calls have been growing, however, for the Coalition to do more to kick-start growth, but what are its options?
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%Greece Ireland Italy UK
(4th October 2010)
UK US Germany
Source: Financial Times (3/10/2011)
Figure 9: Yield on 10 year Government bonds (3rd October 2011)
Yie
ld
13
Fiscal policy options
If the Government is to use fiscal policy to provide some stimulus to the economy, it needs to look at temporary tax cuts or a rephrasing of planned spending cuts that will support growth in the short term without damaging the credibility of the Government’s fiscal consolidation plans in the medium term (and so endangering the low interest rates seen in Figure 9).Thisisadifficultbalancingact,butonethat the Chancellor will need to take a view on in his Autumn Statement on 29November.Welookatsomeoftheoptions below, starting with tax and then moving on to spending.
Temporary tax cuts?
Taxcutswillputmoremoneyback into the pockets of businesses and individuals, encouraging them to consume and invest, thus stimulating growth.Treasuryestimatesofthelossinrevenues to the exchequer provide an indication of the order of magnitude of the fiscal stimulus to the economy although calculating the likely total impact on the economy is more complicated.
If this money is used to consume and invest then these measures could have a significant impact, through multiplier effects and through boosting confidence. However, if the money is just saved or used to pay down debts, then the short term boost to the economy would be much smaller.
CuttingVATbackto17.5%wouldreducethe cost of buying goods and could be implementedveryquickly.Thiswouldfeed through into lower prices for consumers and thus encourage consumption.EstimatesbytheTreasurysuggest it could raise GDP by around 0.3%overayearatacosttotheexchequerofaround£12.5bninthe2012-13financialyear6. Earlier analysis by economists at the National Institute for Economic and Social Research (NIESR)7 suggested that a cut from 17.5%to15%wouldraiseconsumptionby less than 1% and GDP by less than 0.5%,whichisbroadlyconsistentwiththe OBR’s estimate that the increase from17.5%to20%wouldreducerealGDPby0.3%over2011-12.
A reduction in national insurance employer contributions would be anotheroption.Thiswouldhavetheadvantage of reducing directly the costs of employing people by business, encouraging employment and giving businesses and employees more money to spend and invest.
6 http://cdn.hm-treasury.gov.uk/junebudget_ impact_assessments.pdf 7 Barrell,R.andWeale,M.(2009),‘TheEconomics
ofaReductioninVAT’,FiscalStudies,30:17–30.
14
A 1% reduction for main employees would, however, mean that businesses had to pay£3.8bnlessintaxin2012-13accordingtoTreasuryestimatesthatallow for offsetting behavioural effects as far as these can readily be quantified.
Speeding up the reduction in corporation tax is another option. For instance, dropping the rate of corporation tax to 24%in2012-13wouldpotentiallyencourage more multinational business to locate in the UK, providing jobs and money to the UK economy. Based on policy costingsintheMarch2011Budget,theassociated loss to the exchequer would be around£0.9bnin2012/13,includingtheimpact of more firms moving to the UK. Theonlydrawbackofthispolicyisthatsaved taxes from multinationals are likely to go abroad and so not be released directly into the UK economy.
TheGovernmentcouldalsolookatusingtax relief to further promote additional investmentthrough100%firstyearcapital allowances on plant and machinery, although this would go against the aim of the Government to simplify the corporate tax system by reducing such tax reliefs in return for lower headline corporate tax rates.
All such options would cost money, however, and the impacts on the economy of purely temporary tax cuts mightnotbegreat.TheChancellorwilltherefore need a lot of convincing8 to go down this path given the possible adverse effects on the credibility of his medium term fiscal consolidation plan from such tax changes.
Spending
TheGovernmentisunlikelytowanttochange the medium term direction of its spending plans, but the question is whether it could rephase some of the spending cuts, particularly as regards to capital projects given that these would not have a major impact on the structural current budget deficit elimination target.9
Bringing forward capital spending could increase employment in the short term to the extent it was focused on labour-intensive projects that could be accelerated relatively quickly. However, increasing the pace of activity on a major new infrastructure project over a short time-scale is likely to be difficult. Bringing forward repair and maintenance work may be a more viable option, although, here too, care would need to be taken to ensure that this work is really needed and part of a medium to long term plan.
Rephasing current spending cuts seems less attractive as there is a credibility risk with this strategy: investors may start to believe that this change in plans will be permanent not temporary and so that current spending will no longer come down sharply enough in future to allow the Government to achieve its deficit reductiontargets.Thiscouldstarttopush up the cost of government borrowing, possibly quite suddenly and sharply, based on the recent experience of countries such as Spain and Italy.
In summary, there are options for the Chancellor to adjust the pace of the fiscal squeeze but these are not easy or costless. Some rephrasing of capital spending cuts may be the most attractive option since this can be justified as supporting long term infrastructure needs whilst also not directly threatening medium term targets for the structural current budget deficit (which excludesnetcapitalspending).
Some targeted temporary tax cuts might also be considered but these seem unlikely to be on a large scale given the fiscal position, unless the economy deteriorates significantly further between now and the Autumn Statement on29November.
Other policy options
TheChancellormayalsoconsidersomeother policy options, including ‘credit easing’assignalledinhisspeechon3rdOctober. In principle, the objective is laudable in terms of helping small and medium-sizedenterprises(SMEs)facingworking capital problems due to constraints on bank lending. Such businesses will be critical to maintain the private sector job gains we have seen in the recovery so far. However, further details are needed before a proper evaluation can be made of the likely scale and economic impact of such credit easing.
Another option would be to look again at the employment-related regulatory burden on SMEs, although this is already part of the Government’s agenda and making rapid progress here is never easy in practice. Other specific measures would be to defer planned increases in the minimum wage for younger workers, given particularly high unemployment ratesintheunder-25agegroup,asdiscussed previously.
8 TheChancellor’sspeechtotheConservativePartyconferenceon3rdOctober2011didnotindicateanyparticular enthusiasm for temporary tax cuts given the associated risk of a loss of fiscal credibility for uncertain returns in terms of boosting the economy.
9 Thiswouldaddtothedebtstockandsotodebtinterest payments, however, so there would be secondary impacts on the current budget balance via this effect.
15
The public’s view
Whatever the Chancellor’s decisions, the Autumn Statement will need to communicate a compelling message as to how the principles underpinning the Spending Review settlement – of Reform, Growth and Fairness – are being achieved. In the context of continuing fiscal consolidation, global economic slowdown and market volatility, it is essential for the Coalition to deliver on its principles and generate much needed confidence in the future of the economy. But how can the Coalition best get its message across and win over an anxious electorate?
We reconvened our Citizens’ Jury (seeBoxfordetails)tounderstandtheviews of a well informed selection of the British public on the key decisions of government in the last year and the challenges looking ahead for growth and public service reform.
The Citizens’ Jury
We first convened the Citizens’ Jury inJuly2010aspartofourresponsetotheSpendingReview2010consultation10. We wanted to help inform the Coalition’s thinking by providing insight into the public’s attitudes and views on the deficit, and to understand what is important to citizens when selecting where and how to make cuts in public spending. We brought the Jury back after the Chancellor’s announcementinNovember2010 to explore their views on the decisions Government had made and how well those decisions met the criteria they had developed11.
InSeptember2011wereconvenedourCitizens’Jury–agroupof16people who had taken part in the two previous Juries – to discuss the Coalition Government’s first year in dealing with the deficit, and to look at issues surrounding the Open Public Services White Paper.12
10 ‘Dealingwiththedeficit:ResponsetoSpending Review2010Consultation’,PwC2010. 11 ‘TheJury’sVerdict’,PwC2010. 12 Open Public Services’, White Paper, HM Government, July2011.
16
A mood of anxiety and uncertainty
At the reconvened Jury in September 2011,wefirstestablishedtheJury’smoodwhich could be characterised as one of:
• Anxiety, as to when and how public spending cuts will have their greatest impact.Therewasastrongfeelingofforeboding amongst Jurors that the worst economic impact was still to come. Jurors were anxious about this prospect, but still not yet entirely sure of exactly how these cuts would affect themandtheirfamilies.Therewasalso a sense that the economic problems are global in scale, leaving the UK with limited scope to make change. Alongside the economic concerns, Jurors were also anxious about social issues, particularly in light of the riots in the summer.
• Uncertainty, about government’s long term plan where the Jury lacked asenseofdirection.Thesenseofuncertainty was heightened by the feeling that the Coalition was not quite speaking with one voice. Therewasalsoafeelingthatthechanges made so far were quite small in comparison to the scale of the change that is needed in the UK to deal with the deficit and stimulate growth and new jobs.
• Dissatisfaction, with government communications.TheJurorsallagreed that being informed about the nature and the scale of the deficit had helped them to feel slightly more optimistic or confident than their less well-informed friends and family throughtheJuryprocess.Thishadhelped them to accept cuts more willingly – understanding the problem did help – and they did recognise that some real changes are beginning to happen. However, they doubted that the message had really got through to the wider UK population.
In order to identify the challenges facing the Chancellor in delivering on his Spending Review principles, the Jury was then asked to assess whether they felt the criteria they had originally developedstillapplied(whichtheydid)and how well each of the criteria that they had developed before the Spending Reviewhasbeenmet.TheJurors’original seven criteria fit very closely with the principles which the Chancellor set out to guide the Spending Review: Reform, Growth and Fairness (seeBox)andtheirviewsontheCoalition’s progress are therefore discussed in more detail.
Citizen’s Criteria13
Reform
• Encourage people to take personal responsibility.
• Makeadministrativesavings.
• Bepreparedtostartagain.
Grow h
• Give us a long term future.
• Invest to Save.
Fairness
• Sharethepain.
• Postponethenice-to-haves.
13 ‘Dealingwiththedeficit:ResponsetoSpendingReview2010Consultation’,PwC2010.
17
Reform
Public service reform received an amber light.TheJurysawsomepositivedevelopments and felt that structural reforms have begun to appear, for instance:
• reformingwelfarespending such as making it pay to be in work through tighter controls and more means-testing of benefits; and
• makingadministrativesavings including back office cost-cutting and mergers such as combining police forces.
TheJuryapplaudedthistypeofchangebut still felt as though government has not gone far enough and has not been able to make more deep-seated cultural reforms. Jurors felt that the Government had not managed to ‘start again’ in many areas but also conceded that there is strong opposition to fundamental changes from within the public sector, such as from the unions and professional bodies, as well as the public. Jurors also believed that reform was proving particularly difficult in coalition, with sometimes differing priorities between the two partners in government.
Growth
Growth received a red light: the Jury did not feel clear on the Coalition’s long term aims or convinced that investments were being made for the future, particularly in providing facilities and support for young people.
Key areas of discussion included:
• Education, with strong Jury support for the protected core teaching budgets in primary and secondary schools, but concern over the scale of tuition fees and the lack of jobs and training schemes for school leaversat16;
• Defencespending, in the wake of the Libyan conflict with varying views over the role that Britain should play in world affairs; and
• Alternativeenergy, which was cited as a good example of investing to save but where there were concerns about cost and how this could be funded in the short term.
Fairness
Fairness received an amber light as the Jury had mixed views on the extent to which they felt this principle has been achieved.
On the one hand, there was strong support for postponing “nice-to-haves” suchas(intheireyes)HighSpeedRail.Therewasalsosupportforgivinglocalauthorities control over how to cut their own budgets as they felt that local knowledge would enable councils to make cuts in the fairest way. However, there was some concern as to whether councils would make these cuts in a way that prioritised the needs of the community and a suggestion from some Jurors that some central oversight was necessary to ensure fairness across the country.
On the other hand, the Jury felt more couldstillbedone.Thiswasseenmostclearly with respect to welfare spending and a desire to increase the level of means-testing of benefit payments. TheJurorsdidnotfocusonlyoncuts, but also on support e.g. training Job Centre staff to offer better, more targeted help to encourage people into work.
18
The challenges for government
From the nature of their discussions, Jurors clearly recognised that the situation is complex and that every decision has trade offs which need to be effectively considered and communicated.
In our view, the Jury’s deliberations highlighted two key challenges that the Coalition must grapple with whilst dealing with the deficit:
• delivering public service reform, and in particular the Open Public Services agenda; and
• delivering on growth.
We discuss these challenges in turn below.
Out in the Open
Rising demand for public services, reduced government spend and the need for a leaner, more efficient public sector, mean public service reform is central the Coalition’s agenda.
In its White Paper, the Government has signalled a shift to an “open public sector”, with more diverse providers, greater citizen choice and increased competition. In our view, there are two issues to address: engaging the public; and the putting in place the practical steps needed to make change happen.
Engaging the public
Our most recent research with the Citizens’ Jury suggests that there is a real engagement challenge for the Coalition if it is to buy-in more of the public to the Open Public Services agenda (seeBox).Forinstance,onthetopicofneighbourhood public services, Jurors were initially very enthusiastic about the prospect of Neighbourhood Councils taking on the delivery of local services. In discussion, however, this enthusiasm wastemperedasthescale(andrisk)ofthe challenge and the potential barriers were considered:
• Information would need to be clearer and more accessible on how to set up and run these Councils.
• As soon as elections were mentioned, Jurors worried that Neighbourhood Councils would just add another layer of bureaucracy which could offset cost cutting.
• Jurors were also concerned about the levels of responsibility which ‘ordinary people’ could take on – this was a limiting factor both to the range of people likely to get involved as well as the range of services which the Neighbourhood Councils could deliver.
• Jurors were clear that Neighbourhood Councils could only succeed in communities where there are clear cut local problems to be solved, and that there would need to be ‘ambassador’ individuals – well known, skilled, charismatic locals to lead the projects.
• TheJurywasnotconvincedthatthetypes of people who are likely to get involved are the same group as those whose involvement is important in order to confer relevance and legitimacy. In order to bridge this gap, they recommended specific strategies aimed at tackling barriers to different groups’ involvement. Crucial to their solutions was to use word of mouth and relationships to build trust in the process.
• TheJurorswerealsoadamantthatparty politics must be kept out in order for Neighbourhood Councils to be a success.
19
TheJurydeliberatedontheGovernment’s five principles for public service reform:
• Diversity: public services should be open to a range of providers.
• Decentralisation:power should be decentralised to the lowest appropriate level.
• Choice: whenever possible the aim is to increase choice.
• Accountability: public services should be accountable to users and taxpayers.
• Fairness: fair access to public services.
Jurors found these principles initially challenging to get to grips with, finding them overcomplicated, but once they had been given experts’
insights, and as a result gained a better understanding of them, they were left wondering why these principles were not already the norm. In addition:
• Jurors were unsure about whether too much choice would necessarily be a good thing, as it potentially makes systems too complex for both providers and users.
• Jurors felt that accountability was important, but that this could not be achieved simply by publishing greater amounts of data – instead Jurors felt there is a need for an independent mediator to process, analyse and communicate this data.
• Jurors strongly supported the decentralisation and fairness principles, but could not work out how both could be enforced, due to the risk of postcode lotteries.
The Citizen’s Jury and Open Public ServicesMaking things happen
Theotherchallengeforgovernmentistogo beyond articulating the vision and actually make change happen across substantial parts of the public sector. In our recently published submission to the Open Public Services consultation14 we highlight three key challenges that need to be addressed. Firstly, for public services to open up, we argue that citizens need to be empowered with meaningful information and have a say in the way services are run, suppliers need to have real incentives and a level playing field, and government must set a strong regulatory framework, with a focus on outcomes.
Secondly, for open public services to be accountable to citizens, our research15 shows that three powers need to be devolved and aligned: decision-making; delivery and performance; and budget-setting and financial control. If any of these three powers are split between organisations, it makes it much more difficult to hold any one of them to account for outcomes.
Finally, government needs to look again at using private sector know-how and capital to finance the public services and infrastructureofthefuture.Thisincludesuse of mechanisms such as social impact bonds,TaxIncrementFinancingatthelocal level and Public Private Partnerships nationally. As part of this, central government should also consider charging for more public services both to raise revenue and manage demand (through nudging business and consumer behaviourtowardscertainoutcomes).
14 ‘OutintheOpen:deliveringpublicservicereform’, PwC2011. 15 ‘Who’saccountable?’,PwC2009.
20
Growth
Thesecondmajorchallengeistoconveya convincing narrative which fits with economic success and the current austere economic realities in the minds of the public and business. Clearly, this has not been an easy task so far for the Coalition, complicated not only by global economic conditions, but also by the perception, in the light of the banking crisis, that not all of the growth in the past decade has been of unqualified benefit to UK plc.
Notwithstanding the discussions at the moment regarding Plans A or A+, it is important to establish a vision for growth, articulated in a way that resonates with the public and business. In this context, our current ‘Good Growth’ research programme16 is significant as it paints a picture of the factors important to public in the work and money sides of their lives, such as good health and the ability to work for longer as retirement ages increase. Initial key findings are set out in the Box17.
Our research shows that the public is feeling the pinch and prioritising ‘here and now’ issues such as having a job to pay the bills. But government must also have an eye on longer term issues like affordable housing, infrastructure investment, saving for retirement and moving towards a low carbon economy, if UK plc is to succeed in the long term. In this context, the impact of spending cuts on the labour market discussed earlier acquires particular significance.
What is good growth?
ThefirststageofthejointDemos-PwCproject involved a one-day deliberative workshopcomprising31membersoftheBritishpublicaged18-65,drawnfrom across the socio-economic spectrum.Throughin-depthdiscussion,supported by expert briefings, this event sought to identify the things that people look for in the work and money side of their lives and the resulting priorities for government economic policy. Key findings included:
• Reflecting the tough economic climate, people’s personal priorities were motivated primarily by ‘preservation’ rather than ‘aspiration’. Workshop participants were mainly concerned with retaining what they had, prioritising job security and the ability to pay bills.
• People thought that health must be included as part of UK economic policy as it is seen as being directly linked to ability to work and so ensure individual and household financial stability.
• A larger UK manufacturing sector as part of economic rebalancing came out as one of the top priorities for future economic growth.
• People saw key economic and social issues as being closely interconnected. For example, most participants viewed education not as an end in itself, but rather as a means to achieve a successful career.
16 Demos-PwCGoodGrowthIndex(tobepublishedin November,2011).17 TheDemos/PwCGoodGrowthinvolvescreatinga
“Good Growth Index” tracking key indicators that contribute to UK economic success both at national and regional level. Publication of results is due in November2011.
21
Conclusions
With public sector recession hampering recovery of the labour market and offsetting some of the private sector job gains, the public will expect initiatives which accelerate the creation of jobs in the Autumn Statement.
Our analysis shows that gains in public sector employment during recession have now been reversed sincelate2009,withanetfallin publicsectoremploymentof290,000 uptoJune2011.
Butthishasbeenoffsetby617,000private sector job gains since recession ended although many of these have been part-time jobs and there have been significant variations by industry sector, with construction continuing to suffer. Even so, there is a persistent feeling amongst the public of uncertainty around the future and an expectation that the worst is still to come.
It is also clear that the spending cuts have affected all parts of the public sector, but with local government particularly badly affected. PwC’s recent survey shows that councils are achieving savings through changing support services or the “back office”, improving service deliveryprocessesand/orrestructuringmanagement.Thefocushasthereforebeen largely around “doing things differently” and more efficiently.
21
22
Where councils have made reductions to frontline services, these have largely been in libraries, youth services, areas of adult social care, highways and ground maintenance.
Thechallengenowforlocalgovernmentand other parts of the public sector is not only how to “do things differently” but how to “do different things” and mitigate the impact of further cuts in spendingonserviceusers.Thereformsset out in the Open Public Services White Paper will be key to achieving this goal, although there are real challenges in engaging the public on this agenda and making change happen across substantial parts of the public sector.
All of the UK regions have also seen some public sector job cuts, but worst affected are North East and South West, with devolved countries getting off relatively lightly so far, a fact which is also reflected in overall employment trendsbyregions.Thequestionarising is – will these patterns continue once spending cuts begin in earnest, including in the devolved administrations?
Given the more difficult than expected global economic environment over the past year, should the Government’s fiscal plans be adjusted? Our analysis indicates that there are options for the Chancellor to fine-tune the pace of the fiscal squeeze, but these are not easy or costless. Some targeted temporary tax cuts might be considered but these seem unlikely to be on a large scale given the fiscal position, unless the economy deteriorates significantly further between now and the Autumn Statement on29November.Proposalsforcrediteasing aimed particularly at SMEs make some sense in principle, but details are awaited as to how this will work in practice and on what scale.
It appears that some re-phasing of capital spending cuts may be the most attractive option since this can be justified as supporting long term infrastructure needs whilst also not directly threatening medium term targets for the structural current budget deficit (which excludes netcapitalspending).
22
23
John Hawksworth +442072131650 [email protected]
Nick C Jones +442072131593 [email protected]
Rachel Lund +442072133930 [email protected]
Contacts
About the authors
John Hawksworth is Chief Economist at PwC. He is the editor of our regular UK Economic Outlook publication and many other reports and articles on macroeconomic and fiscal policy issues. He first developed PwC’s public financemodelin1992,whichhassincebeenrefined and updated to provide the basis for the projections in this paper and many other analyses.Healsohasover20yearsofexperience as an economics consultant to leading public and private sector organisations, both in the UK and overseas.
Nick Jones is the Global Director of PwC’s Public Sector Research Centre (www.psrc.pwc.com)andhasauthored,andcontributedto, reports on a wide range of public services issues, including co-authoring with John the previous Dealing with Debt and Dealing with (even more) debt reports. He is a member oftheEditorialTeamforPwC’s Annual Global CEO Survey, commenting on the relationship between business and government. As part of this role, he is also responsible for commissioning and directing PwC’s input into major research studies with think tanks.
Research
Rachel Lund is a senior associate in the economics practice. Before joining PwC she worked as government economist, focussing on regional development and climate change policy. She also has a postgraduate degree in international trade, development and finance. She currently works with the macroeconomics team producing the UK Economic outlook and thought leadership pieces.
24
About PwC
PwC’s Government & Public Sector practice has been helping Government and public sector organisations locally, regionally, nationally and internationally for many years. We work with organisations across sectors as diverse as health, education, transport, home affairs, criminal justice, local government, housing, social welfare, defence and international development. Our people combine deep specialist expertise with a genuine understanding of the public sector. Our Government and Public sector practice comprisesofapproximately1,300people,over half of whom work in our consulting business, with the remainder in assurance and tax.
For more information, please visit us on: www.pwc.co.uk/publicsector
PwC also has a significant Economics practice providing a wide range of advisory services covering competition and regulatory issues, litigation support, bids and business cases, public policy and project appraisals, financial economics, the economics of sustainability, business forecasting and strategy, and macroeconomics.
For more information, please visit us on: www.pwc.co.uk/economics
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without performing appropriate due diligence and/or obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained or for any decision based on it.
© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
ThePublicSectorResearchCentreisPwC’sonlinecommunityforinsightand research into the most pressing issues and challenges facing government and publicsectororganisations,todayandinthefuture.
ThePSRCenablesthecollaborativeexchangeofideasbetweenpolicymakers, opinionformers,marketexperts,academicsandpractitionersinternationally.
Toregisterforthisfreeresourcepleasevisitwww.psrc.pwc.com
Join the debate. www.psrc.pwc.com
www.pwc.co.uk
Related Documents
