We must not put a salami slicer to our public services in a bid to balance the books
Our country is deeply in debt, with a deficit that is viewed by the markets as on an unsustainable path. The mini-budget and the subsequent reaction from the markets have undoubtedly made the situation significantly more challenging. The new prime minister must now seize the opportunity to restore fiscal credibility.
Both unfunded tax cuts and unfunded spending pose a potential threat to fiscal responsibility. Any borrowing must be accompanied by a detailed, credible and deliverable plan to show how debt will be kept on a sustainable path.
There is, however, a tendency to simply despair at our current predicament. This is just as unhelpful. There is a way to restore the public finances, and in a report by Policy Exchange, published today, we set out ways to save up to £25bn annually.
There will need to be significant retrenchment on the energy plan, savings in public spending and radical supply-side reform. But behind all of this, there needs to be a new fiscal framework to show all economic actors, including the markets, that we know how to make the finances sustainable over the cycle.
It is not politically feasible to make all the savings by salami-slicing front-line public services. Higher inflation will erode £23bn from the 2020 spending plans. At the same time, the poorest in society should not bear the brunt of this crisis, and Sunak should increase benefits in line with inflation. But this cannot come without a cost.
As a counterbalance, ending the pensions triple-lock should be on the table to save £11bn in two years time. Until we are spending the current allocation more effectively, our defence spending should not go up to 3 per cent of GDP. And, yes, we should impose a windfall tax on oil and gas producers to raise as much as £16bn in additional revenue. The biggest expenditure, the energy plan, should be more progressive and tiered to incentivise the biggest users to conserve energy where they can.
Currently, too much of the money we do spend is spent poorly. We need to find public sector efficiencies. There are nearly 100,000 more civil servants now than in 2016. Saving £3.5bn from headcount reductions in the civil service and arm’s length bodies; reprioritising at least £2.8bn within the schools budget from education support staff, back-office staff and educational consultancy; saving £500m from cancelling one of the new prisons and saving £4-5bn by reducing Universal Credit fraud to 2018-19 levels are all options for Sunak.
These efficiencies must go alongside a plan for growth. The mini-budget was right to focus on improving Britain’s sluggish growth to boost our long-term prosperity. We should be protecting investment in productive capacity such as transport, energy and skills. Post Brexit, we must finally reform Solvency II to unlock up to £95bn of capital for more infrastructure; and deliver genuine supply-side reform on housing and childcare, where constraints hurt growth and households.
There is no royal road to fiscal responsibility; no path to be taken that does not involve difficult, unpopular, decisions. If the government is prepared to tackle some of the biggest lines in the budget, such as ending the pensions triple-lock, limiting defence spending, or reducing the benefits received by wealthier individuals, then the pressure to make savings elsewhere will be less. If not, then more savings will need to be found from front-line public services – or else taxes will need to rise.