The Prime Minister is, apparently, intending to introduce a “Fiscal Responsibility Act” to tackle Britain’s scandalously bad public sector finances. Well, I suppose, better late than never and I await the details with great interest. I also await the next Pre-Budget Report, which will include the Treasury’s latest economic forecasts and projections for the public finances. In particular, I shall be interested to see whether the Chancellor amends his target for “balancing the budget”.
In the April Budget, Chancellor Darling’s projections included the objective of balancing the “cyclically-adjusted current budget” by financial year 2017/18 (FY2017) and contained plans for fiscal tightening vis-à-vis the 2008 Budget. Specific measures have been announced that will deliver about half of the projected tightening.
Putting aside the issue of whether the public sector finances have deteriorated even faster than expected in the Budget, which they probably have, there is the matter of the wisdom of having so distant a target for balancing the budget. But if a less distant target is picked then the tightening will, of course, have to be even more stringent. According to my calculations, if a target of zero public borrowing by FY2015 is chosen for illustrative purposes, another £70-90 billion of fiscal tightening would be required over the period FY2010 to FY2015.
This tightening can, of course, be met by raising taxes, cutting spending or a judicious combination of the two. Bearing in mind the inevitable damage to competitiveness and incentives from higher taxes, it will come as no surprise that I believe the emphasis should be on spending cuts – and large ones at that. It should, however, be noted that the background to this path of fiscal consolidation will not be benign.
The cost of servicing public debt will rise reflecting the ballooning debt levels, and the spending of local authorities and the NHS will be squeezed by commitments they have made under PFI as well as the ageing population. In addition, there is the enormous burden of public sector unfunded pensions. According to the British-North American Committee (BNAC) Britain’s unfunded pension liability, at £1.18 trillion, amounts to 85% of annual GDP. The ratio is 28% and 27% respectively in the US and Canada, where the majority of public sector schemes are now funded.
The scale of the public finances problem is horrendous and underlines how Gordon Brown, as Chancellor, skirted every looming problem facing the country – preferring instead crowd-pleasing and public-sector-expanding spending stunts. Alas, the country will be paying for his irresponsible stewardship of the economy and the nation’s finances for years to come.