Download Delivering the Deficit Reduction: Rising Phoenix or a Dead

cipfa.org.uk
CIPFA London Division
Delivering the Deficit
Reduction: Rising Phoenix or
Dead Parrot?
11th October 2011
cipfa.org.uk
Welcome &
introductions
Peter Gilmour
Chairman
CIPFA London Division
cipfa.org.uk
\Agenda
Now
Delivering Deficit Reduction
- how much and for how long? – Tony Travers
10:35am
Short-term demands and long-term needs. Can they
both be met?- Rt Hon Simon Hughes
11:05am
Break
11:15am
Will local government finance reform make life easier
for local authorities? – Stephen Jones
11:45am
Panel Debate
12:00pm
Buffet Lunch
Delivering Deficit Reduction
- how much and for how long?
Tony Travers
London School of Economics
The problem
 Britain has an annual budget deficit of c10% of
GDP



£157bn in 2009-10
£137bn in 2010-11 (c10%)
£122bn in 2011-12 (plan)

UK’s relatively robust position…
 Public sector debt in August 2011 was 61.4%
of GDP – up from 55.3% a year earlier
[£1046bn in 2011-12]
 Without reductions in spending and/or
increases in taxation, the deficit and debt will
continue to grow
 Eurozone problems impacting on potential
growth in UK and elsewhere
The government’s solution
 The government is committed to cutting
the deficit to almost zero by 2015, thus
halting the growth of debt
 Deficit reduction requires reduced spending
and/or increased taxation, but without
killing off economic growth
 Major debate about the speed of deficit
reduction
 Labour pledged to slower pace of change
 But, this would push up the deficit even more for a
time
What steps so far?
 Comprehensive Spending Review
 Sharp slow-down in the growth of public
expenditure
 Local government to face 14% real terms cuts
over four years
 NHS to see resources frozen in real terms
 NB: pay freeze; but also higher inflation
 Budgets in 2010 and 2011 increased
taxation
 Overall, 80:20 ratio PE:Tax
Impacts
 Government revenues and spending:
 Receipts growing slowly (c1 to 2% pa)
 Expenditure growing slightly faster (2 to 3% pa)
 Deficit in August was the highest ever…
 Chancellor committed to existing CSR plans
 No boost to spending or tax cuts
 Increase in wider concern about slowing GDP growth
 Slower economic growth would risk the need for
further spending cuts/tax rises
 Inflation is, it would appear, being allowed to inch
upwards – which has the effect of reducing the real
value of debt (public and private)
Spending impacts
 Local government has faced deeper
reductions than central departments
 Council employment down to levels in 2000
 falling since 2007
 NHS “real terms freeze” has led to
very different pressures than the
heath service had been used to
 20% ‘efficiency’ savings
 Little evidence from Gershon etc about realism
of such efficiency efforts
 Also, major reform of administration
The period to 2015-16
 Evidence suggests deficit reduction
will be even more difficult than
originally envisaged
 If growth falls to 0% to 1% this year
than then remains below the trend
(2.5%) figure, it is likely there will
have to be either:
 A further round of expenditure cuts and/or
 Public sector austerity beyond 2015-16
Longer-term impacts
 Britain will have experienced an
‘Everest-shaped’ public sector
expansion and contraction between
2000 and 2016
 Not ‘Keynesian’ at all
 Boosting public spending during an
economic boom, then cutting while growth
is fragile
 By 2016-17 and beyond, many
services will feel stressed
 Though spending still well above 2000 levels
CSR 2007
[Slide used at CIPFA conference on 12 June 2007]
 Likely to reinforce…developed trend
 Will leave a number of services with zero
real terms spending increases for three
years
 The next SR is unlikely to alter this pattern
 Thus, CSR 2007 is likely to set the trend of
spending…for five or more years
 Opposition parties accept the government’s
view that the State has reached a limit – as
a % of GDP
The Local Government Resource
Review
 Not anything like as wide-ranging a review
as Lyons or, particularly, Layfield
 NDR ‘retention’ + Council tax = LG
spending

However, for several years, any additional
revenue generated will be removed (via ‘setaside’) by the government
 Council tax ‘freeze’ is a populist, but antilocalism move
 Reform will take place at a time when there
is no scope for increased autonomy is such
a centralised country
Questions begged by the once-ina-lifetime economic meltdown…
 How to avoid ‘boom and bust’ within the
public sector?
 Less central control by the Treasury and spending
departments would undoubtedly help
 How to sustain NHS spending in the longer
term?
 Real terms increases of 5%+ pa cannot be sustained
indefinitely
 Should local government be radically
liberated so as to increase fiscal and
spending discipline?
Conclusions
 Local government, the NHS and other parts
of public spending face at least five more
years of austerity
 But, it might be up to 10
 Economic future is less certain than at any
time since 1945
 Possibility still remains of radical adjustment to
living standards, public spending and taxation
 We are not yet at the ‘end of the
beginning’, and certainly not the ‘beginning
of the end’ of the new austerity…
Delivering Deficit Reduction
- how much and for how long?
Tony Travers
London School of Economics
cipfa.org.uk
\Agenda
Now
Short-term demands and long-term needs. Can
they both be met? - Rt Hon Simon Hughes
11:05am
Break
11:15am
Will local government finance reform make life
easier for local authorities? – Stephen Jones
11:45am
Panel Debate
12:00pm
Buffet Lunch
cipfa.org.uk
Short-term demands
and long-term needs.
Can they both be
met?
Simon Hughes
Deputy Leader, Liberal Democrats
MP for Bermondsey and Old Southwark
cipfa.org.uk
\Agenda
Now
Break
11:15am
Will local government finance reform make life
easier for local authorities? – Stephen Jones
11:45am
Panel Debate
12:00pm
Buffet Lunch
Will local government finance
reform make life easier for local
authorities?
Stephen Jones
Director of Finance and Resources, LG
Group
Date
11 October 2011
www.local.gov.uk
www.local.gov.uk
The climate is tough out there …
£bn
Local authority funding
30
3.2%
28
3.0%
2.8%
26
2.6%
24
2.4%
22
2.2%
20
2.0%
2010-11
2011-12
2012-13
CLG Core funding
2013-14
GDP deflator
2014-15
Service costs are set to rise
• Many services are subject to demographic
and inflationary cost pressures
• So when funding falls, these pressures
become acute
• For example – adult social care
demographics increase costs by 4% p.a.
• If costs get out of line with income, the gap
can rise rapidly
Reforms localise – but control
income
• Business rates relocalisation – within
spending review totals for 2013-14 and
2014-15
• Council tax benefit localisation – with a
10% cut
• Council tax freeze grant
• New arrangements for council tax
referenda to replace capping
Two big issues
• Can we get the growth to fund public
services?
• Can we manage the new risks that come
with localisation?
Local Government Resource Review
- Government’s principles for
change
• Reduce local government dependence on
central government
• Provide a financial incentive for local authorities
to promote growth
• Incorporate redistribution so that local authorities
can meet local needs
• Protect business: no increase in locally imposed
taxation without agreement.
LGRR - What councils are looking
for
• Stability and predictability
• Resources to keep pace with need
• Greater autonomy
• Reward for successful performance
So why is it all getting so
difficult?
• Treasury insistence on ‘set aside’ means that
the business rate does not belong to local
communities.
• The complexity of the design means that the
financial incentives for growth are not clear.
• There are big questions about fairness and
stability that the consultation papers do not
answer.
Arithmetic of the set-aside
Estimated NNDR yield
CSR Formula Grant +
AME
Difference
2012-13
23.7
2013-14
24.8
2014-15
25.9
23.9
23.7
22.4
(0.2)
1.1
3.5
• The 2011 Budget material includes a forecast of UK wide business
rates receipts and forecasts of RPI inflation
• From this it appears that the government is expecting around 1.3%
real growth in business rates yield in 2013-14 and 0.7% real in
2013-14
• Higher inflation forecasts than at the time of CSR account for about
half of the £3.5bn set-aside for 2014-15
Analysis of the CLG proposals …
• If average growth rates over 2005-06 to 2009-10
were replicated, and assuming that the sector
had full access to growth, then potentially:
– Individual authority funding might grow by between
just over 2% p.a. and 19% p.a.
– ‘Tariff’ authorities have the biggest potential gains
– A lot depends on how the levy and the safety net
work
Council tax benefit localisation
•
•
•
•
Across the country, CTB costs about £5bn
There are 5 million claimants
About half of these are pensioners
From April 2013 CTB will be replaced by local
schemes, but:
– Pensioners will be protected
– There will be a £500m cut in the money available
– Councils will manage the demand risk
Growth and risk issues
• Business rates localisation can work longer
term, and we want it to, but the scheme needs to
be simpler and clearer, and better align
resources to needs.
• The Treasury set-aside needs a major re-think.
• CTB localisation brings significant new risks
cipfa.org.uk
\Agenda
Now
Panel Debate
12:00pm
Buffet Lunch
cipfa.org.uk
Panel Debate
cipfa.org.uk
CIPFA London Division
www.CIPFALondonDivision.org.uk
Thank you for attending