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BusinessFutures Public Spending report 2015
Does debt matter?
As of June 2015, global government debt exceeded the unimaginable sum of $56 trillion.
To service this debt, governments have to raise taxes and, from time to time, renegotiate
their borrowings.
As The Economist says: ‘When debt rises faster than economic output (as it has been doing
in recent years), higher government debt implies more state interference in the economy and
higher taxes in the future.
‘Second, debt must be rolled over at regular intervals. This creates a recurring popularity test
for individual governments. Fail that vote, as various euro-zone governments have done,
and the country (and its neighbours) can be plunged into crisis.’
In the absence of a financial crisis, and in ‘normal’ economic times, government debt may
not be of any great significance though the more it increases, the greater the risk that it may
provoke some sort of difficulty.
By and large, in ‘normal’ times, businesses are only marginally affected by the level of
government borrowing, through its impact on interest rates, and by the level of government
spending, through the availability of public-sector contracts.
What does affect them is how the State raises the money it needs to meet its obligations.
Levels of corporate tax, taxes on jobs, business rates as well as direct and indirect taxes on
their customers, suppliers and employees all have a direct impact on company performance.
And as the IMF says: ‘Higher public debt leads to lower investment, slower transitional
growth, and a lower long-run level of output: debt is bad for growth.’
In an ideal world, government debts will shrink to manageable proportions over the next
three decades or so. A combination of peace, gently rising inflation, increased global
economic growth, modest spending cuts and judicious taxation will bring income and
expenditure back into balance.
In the real world, it is unlikely many countries will benefit from such a benign set of
circumstances. Indeed, even those countries which adopted such an approach would be
vulnerable to international shock-waves caused by, for instance, a banking or house-price
crisis, war, terrorism, excessive inflation, natural disaster, prolonged deflation, the
bankruptcy of highly-indebted nations – in other words by unforeseen ‘events’.
Every nation is at risk from ‘events’, any of which is likely to require a sudden increase in
government borrowing. The countries best-placed to cope with the unexpected will be those
with the fewest debts.
At the most fundamental level, therefore, the level of national debt is closely related to its
chances of surviving a cataclysmic event.
However, even indebted nations can still borrow money provided they are clearly managing
their income and expenditure responsibly. And there will always be debate about the ‘right’
level of public spending as a proportion of GDP.
This can vary hugely, with economically successful nations at both ends of the scale – there
are high levels of public spending to GDP in prosperous Scandinavian countries, for
instance, and low levels in the rich ‘city states’ of the Far East.
Balancing the books would be easier if there were not so many variables. One of the
difficulties for many economies, including the G7 nations, is establishing what they actually
mean by debt in the first place. The official figures, as ICAEW has argued elsewhere, are
misleading. Whole of Government Accounts yield new, larger, sets of figures which
demonstrate a greater level of indebtedness than the official numbers.
Even that doesn’t show us the whole picture, though, because governments do not include
in their accounts the unfunded future spending commitments they, and previous
administrations, have made. Even where legally-enforceable commitments to pensions for
public-sector workers are accounted for, commitments to future State pensioners in terms of
income, social care and healthcare, are not considered part of a government’s debt. Yet they
are certainly liabilities which will have to be met (or, perhaps, avoided) by future taxpayers.
Even a country like China, with modest debts to GDP, has long-term liabilities to an ageing
population which could transform the apparently benign state of its finances. And some
estimates suggest Germany’s real debt is not 74% of GDP but, because of its unfunded
promises to pensioners and the sick, is actually 185%.
Borrowing to invest
Today’s investment is tomorrow’s debt burden. But you have to speculate to accumulate.
Judicious use of borrowed money can yield a significant return, as most home-buyers over
the past 50 years can attest.
Governments, like individuals, regularly ‘borrow to invest’ and in many cases evidence can
be found to prove the wisdom of the initial decision. Of course, the reliability of that evidence
can sometimes be called into question in the same way that projections for the future
benefits of today’s infrastructure schemes are based on calculations and assumptions which
may not – for a wide variety of good reasons – accord with reality.
Borrowing and investment decisions are ultimately made on the basis of the best available
estimates coupled with less tangible considerations such as the political desirability of a
project or its perceived social benefit.
This will always be the case, given that any cost-benefit analysis will be subject to challenge
and change. But when governments invest in infrastructure they are, at least, spending
money on something tangible which may well produce genuine benefits even when those
benefits are of less value than the money invested.
Borrowing to spend
All borrowing is to finance expenditure, of course, but much government debt is incurred to
finance recurring expenditure rather than, for instance, to build new infrastructure.
Sometimes there are good reasons for this. War, for instance, invariably requires sudden
and massive increases in government spending for the duration. It was only in March 2015
that Britain repaid the final tranche of the debts incurred during the First World War. The
financial crisis of 2008 triggered a wave of increased government borrowing around the
world as it became generally accepted bank bailouts were the only method of keeping the
capitalist system from complete collapse.
Exceptional circumstances – war or economic collapse being the two most obvious – require
exceptional measures. Government borrowing on such occasions tends to be reasonably
short term and specific. It may take a long time to repay the debt and may well represent a
long-term burden to future taxpayers but such borrowing is more or less inescapable and
easy for politicians to justify.
More problematic is the debt governments enter into voluntarily to finance current, nonemergency, expenditure.
The vagaries of the economic cycle mean it is difficult, if not impossible, for a government to
get its tax and spending in equilibrium for more than a moment. Adjustments will always
have to be made even without taking into account the political pressures for lower taxes
and/or higher spending. That is different, however, from taking a conscious decision
consistently to spend more money than an economy generates in tax revenues.
Government deficits are made up of various elements: borrowing for long-term investment;
borrowing to finance sudden shocks to the system; and borrowing to finance current
expenditure.
In each case, the expectation is that the debt will be paid down over many years through the
twin benefits of economic growth and inflation. It is generally accepted that, as an economy
grows, a government’s revenues rise without the need for any material tax increase.
It is also true that, over time, inflation turns today’s massive burden into tomorrow’s light
load. Britain’s First World War borrowing reached £7.9bn by 1919 and, as we have seen, it
took a century to discharge the debt. Over that period, the interest rate payable on the debt
was cut while repayments to the US were frozen during the 1930s depression. However,
thanks to a century of inflation, the £7.9bn needed to win a world war is, in cash terms, less
than Britain now spends in 12 months on overseas aid. (Adjusted for inflation, of course, it
would look very different: at today’s values, Britain borrowed about £375bn to finance the
war effort).
Printing money
In recent years, Britain, the US, Japan and the European Central Bank have resorted to
another tactic to finance their activities and ensure there is still enough money in the
economy to keep the wheels of industry turning.
The controversial policy of quantitative easing (QE) has seen several governments use their
own central banks to buy up their own debts. This kept interest rates close to zero and
ensured the supply of money grew. The long-term impact is still to be determined though, if
QE is essentially inflationary, rising prices and interest rates cannot be avoided for ever.
Given the aim of QE is to boost a country’s money supply, no assessment of its success can
take place without understanding what happened to the money. It is difficult to establish
where the billions of QE money have been invested but, in the UK, the sharp rise in house
prices following the 2008 recession – 22% nationally and 55% in Greater London between
2009 and 2015 – is evidence that much of it has fuelled another property boom.
QE cannot last long without imposing significant inflationary pressures on an economy. It
isn’t a giant leap from the judicious use of the policy to stimulate economic activity in the
teeth of a recessionary gale, to reliance on artificially boosting the money supply until it
reaches the point, as it did in Zimbabwe in 2008-9, where inflation hit an estimated 79.6bn%,
when an economy is blown away by hyperinflation.
QE should have the benefit of devaluing a currency and, therefore, devaluing a country’s
debts. However, in an era of competitive devaluation, this will not work.
Printing money is not, therefore, a sustainable answer to a country’s debt problem. It is only
a viable response to a cataclysmic global crisis.
‘Normal economic circumstances’
In 2015, Chancellor George Osborne announced legislation which would prevent future
governments from running a budget deficit under ‘normal’ circumstances. Apart from the
inevitable debate about what ‘normal’ might mean, there is considerable doubt about how far
this would actually restrict a future Chancellor.
The Economist noted the yield on government bonds had not changed since the
announcement and said: ‘Investors probably know, as Mr Osborne certainly does, that these
rules come and go. The Chancellor himself repealed a fiscal rule set by a previous Labour
government, and proceeded to smash through it (reasonably enough) after the economy
took a turn for the worse in 2012. In 1998 France and Germany tried to impose a fiscal rule
on fellow euro-zone members, but five years later when they wanted to break its limits, they
blocked its implementation.’
In the past half century, Britain has run a budget surplus for only seven years (1988-9 and
1997-2001). It seems unlikely ‘normal’ circumstances will prevail for many of the next 30
years. And there are plenty of experts arguing a heavy-handed approach to austerity
spending cuts does more harm than good. Notable among them is the International
Monetary Fund (IMF), which argues most countries need not worry about their debts, which
should be allowed to decline ‘organically’ without the need for drastic spending cuts. Indeed,
in 2015 the IMF said further borrowing could only be ruled out in four countries: Cyprus,
Greece, Italy and Japan.
Yet the IMF itself, following the figures set by the EU when it established the euro, a debt-toGDP ratio of 60% is regarded as a sensible limit for developed countries with a 40% ratio for
developing and emerging economies. It would seem highly optimistic for this to be regarded
as a realistic yardstick, however, because among the countries with higher debt-to-GDP
levels are almost all of the world’s leading economic powers: India, Brazil, Holland, Austria,
Germany, Spain, Canada, France, the UK, US, Italy and Japan.
Live long and prosper
Even in the absence of war, serious economic shocks or Chancellors on pre-election
spending splurges, it is questionable what ‘normal’ really means. Especially when some
pressures on public spending, in most Western countries, are likely to grow inexorably as a
result of the world’s ageing population.
We have already seen the impact of the world’s growing number of elderly people with,
among other things, crises in the health and care services; the widespread abandonment of
final salary pension schemes because they have become uneconomic; and rises in the State
pension age in Britain and many other countries.
These issues will increasingly affect government spending plans in coming years. According
to the UN, the world’s population is projected to grow from 6.1bn in 2000 to 8.9bn in 2050, a
47% increase.
The UN says: ‘Population ageing is unprecedented, without parallel in human history—and
the twenty-first century will witness even more rapid ageing than did the century just past.’
UN estimates show that, in Europe in 1950, 6m people, or 1.1% of the population, were
aged 80 or above. By 2050, that number will rise to 60m, representing 10% of the
population. In Britain in 1950, 748,000 people were aged 80-plus. By 2050, the number will
be 6.3m. In the year 2000, there were 9,800 centenarians; by 2050 there are expected to be
95,000.
By 2050, one in three of Europe’s population will be aged over 60, compared with one in five
in the year 2000.
Paying for their growing populations of elderly people will, in the absence of war, be the
greatest challenge faced by most countries over the next 50 years or so.
Today Greece, tomorrow the world
Unfunded pension promises, unfunded healthcare commitments and unfunded social care
obligations made by governments across the Western world to their voters will come back to
haunt politicians, taxpayers and the elderly themselves.
Greece is the most obvious recent example of a country which could no longer pay its debts.
There were, of course, special circumstances which do not apply elsewhere. However, the
bottom line was that the Greek Government was spending too much money and could no
longer afford to meet the repayments on its borrowings.
Countries facing this kind of crisis have various options, none of them palatable. They can
renege on their debts, effectively declare bankruptcy and destroy their economies for years
to come. They can increase taxes significantly and seriously damage their private sector
businesses and their citizens’ personal finances. They can cut spending dramatically and
destroy their public sector, risking riots and revolution.
Countries can, and do, face such financial crises from time to time. The real problem is that
so many of them have made commitments to the elderly which they will struggle to meet
without running the risk of reneging on those promises or heading towards a Grecian
financial crisis.
It is open to debate at what point a country’s borrowing becomes unsustainable and tips it
into a crisis. The IMF believes it is when a government is borrowing just to pay interest on its
debt. The US Congressional Budget Office (CBO) says it is hard to predict when a country
may be hit by a financial crisis ‘but all else being equal, the larger a government’s debt, the
greater the risk of a fiscal crisis’.
In its 2015 report, the CBO said: ‘If current laws remained generally unchanged, federal debt
held by the public would exceed 100 percent of GDP by 2040 and continue on an upward
path relative to the size of the economy – a trend that could not be sustained indefinitely.’
Blaming the costs of health and social care, mainly for the elderly, the CBO said US deficits
were ‘projected to rise steadily and, by 2040, to raise federal debt held by the public to a
percentage of GDP seen at only one previous time in U.S. history – the final year of World
War II and the following year’.
The CBO report offers little comfort to decision-makers. To bring down the deficit to its longterm average by 2040, the government would need to boost revenues by 14% each year for
25 years or cut spending by 13% a year. In 2016, that would cost the average US pensioner
$2,400.
Governments face similar unpalatable choices around the world but few of them are
seriously addressing these longer-term issues.
Businesses on benefits
In total, the government spends £7bn on unemployment benefits and £52bn on in-work
benefits – £29.5bn in tax credits, £22.2bn in housing benefits – paid to more than five million
people.
In effect, the State is subsidising employers who can, therefore, get away with paying low
wages. Critics argue employers should increase their lowest pay rates to the UK Living
Wage rate (£9.15 an hour in London, £7.85 elsewhere). It is claimed that alone would save
the taxpayer £6.7bn.
Britain has become the ‘jobs capital’ of Europe, enjoying relatively low levels of
unemployment. This is in part the result of the country’s low-wage economy, where it is
estimated one worker in 20 is on the national minimum wage of £6.50 an hour in 2014-15 (a
further 300,000 young people were on less than the minimum wage).
If employers agreed, or were forced, to increase basic pay to the living wage rate, it would
almost certainly result in lost jobs. It is also doubtful if it would make a substantial difference
to the government’s in-work benefits bill. And if benefits were withdrawn at the same rate as
wages rose, employees would be no better off.
Even so, the State cannot afford to continue to subsidise profitable private-sector businesses
indefinitely in this way. Measures are already being taken by the government to limit the
benefits payable to workers. The pressure to minimise the welfare bill is unlikely to ease off.
Employers will therefore face increasing pressure to provide a minimum level of pay which
allows staff to survive without the need for State support.
The quid pro quo should, of course, be a reduction in job taxes – National Insurance,
corporate taxes and business rates, for instance – but it is unlikely to be that straightforward.
Of course, the main reason for in-work benefits is to subsidise housing costs, necessary
because there is a housing shortage in the UK which means rents continue to rise. It seems
probable that local authorities with greater tax-raising powers will take action over empty
properties and impose some sort of tax on individual homes or whole blocks which are left
vacant for any length of time. Despite the need for more house building, there are
opportunities to make better use of existing housing stock, which would limit rent and price
rises and make accommodation more affordable without the need for state subsidies.
Poor pensioners
Future generations will have to provide pensions for themselves. A modest beginning has
been made through the UK’s ‘stakeholder pension’ scheme but it is hopelessly inadequate to
meet future needs.
Britain requires pension reform along the lines of Australia’s stakeholder scheme which
gradually increased employer contributions so it now represents 12.5% of salary and shifted
the State’s pension responsibilities to self-funded schemes (though the pension freedom
pioneered in Australia and recently replicated in Britain has not been entirely successful, with
many pensioners exhausting their resources by the age of 70).
Pension reform would not resolve the problem in the medium-term and, indeed, it could
exacerbate the UK’s debt difficulties for a time, but major reform is necessary before today’s
children become tomorrow’s pensioners.
Reform is also needed to tackle public sector pension liabilities. Some changes have been
introduced but, instead of being funded out of current tax revenues, the public sector needs
a proper contributory scheme with assets which can be invested. The hope has been that
economic growth will always generate enough tax income to fund the State’s pension
commitments but with fewer people working in the public sector, people living longer and
public sector pensions still relatively generous, this is less likely in future. In the ‘fully-funded’
local government scheme, employers have been forced to increase contributions by 20% to
make up shortfalls.
A funded public sector pension scheme would be able to invest in long-term infrastructure
schemes or building more houses. It would increase the national debt in the medium term,
as the government simultaneously paid existing pension entitlements and invested in a new
pension fund. But given the other demands on the public purse, the issue will have to be
addressed.
A fat tax
The National Health Service (NHS) costs about £180 per person per month which is similar
to the cost elsewhere in the EU. Social care costs another £40 per person per month. NHS
spending has risen by more than the rate of inflation but social care spending has fallen.
Pressure on the health service will not decline. Adult social care and the NHS will have to be
administered as one, not as separate entities. This would improve efficiency and provide
better patient care.
The development of city regions or combined authorities in Britain could make a difference if
these new bodies, with or without an elected mayor, were able to bring together the health
service and local councils.
The ambition, ‘joining up health and social care to allow people to live at home and remain
independent for longer, relieving pressure on acute services’ has been instituted in Wales
but has not yet proved successful. Even so, over time this integration should create a more
effective and cost-efficient service for the elderly.
Yet the costs of running a health service free at the point of delivery will continue to outstrip
inflation.
Unpalatable though it is for politicians even to contemplate, it seems inevitable that over the
next 25 years or so the delivery of health services will have to change. Demand
management policies – in other words, charging for some services such as straightforward
appointments or some of the less life-threatening procedures currently provided for free –
cannot be avoided indefinitely.
Likewise, policies to minimise the need for health services are also likely. In particular, it
would seem reasonable for a future government to introduce a ‘sugar tax’. High taxes on
tobacco and alcohol have, to some extent, reduced the number of people requiring NHS
treatment as a result of tobacco or alcohol-related illnesses. Given Britain’s obesity epidemic
– indeed this is a worldwide phenomenon – a tax system which discouraged people from
consuming fatty foods would seem both desirable and, from a Treasury point of view,
lucrative.
The extension of VAT to cover certain unhealthy foods would be a simple and effective
means of imposing a ‘sugar tax’. It would be argued the tax penalised the least well-off most
harshly but that would not necessarily be the case – it would penalise most those people
who ate the fattiest foods and, in so doing, would help them maintain a good state of health.
Some businesses would be hit by this tax but the imposition would encourage the
development of less fattening alternative products and provide new opportunities for
companies ready and willing to adapt to the new regime.
Banking on the government
The 2008 banking crisis led to the worldwide nationalisation of banks as governments
stepped in to bail them out and protect depositors rather than risk the consequences of
widespread collapse. This may have been a necessary step but it increased taxpayers’
liabilities and sets a dangerous precedent for the future.
Though reform of the banking system is under way, there is as yet no explicit understanding
that a bank will succeed or fail without any intervention from the taxpayer. As a result, even
those banks which do not have taxpayer shareholders nevertheless enjoy an implicit
government guarantee that they will not go bankrupt.
This ‘too big to fail’ policy may have been a necessary evil in 2008 but it is not likely to
remain in place in a generation’s time. By then, a new regime may well have developed
which ensures the failure of one bank cannot bring down all the others and that the taxpayer
cannot be relied on to come to the rescue.
As a result, customers will have to exercise much greater caution over where they put their
money in future and will be obliged to satisfy themselves that their chosen bank’s policies
are safe enough to withstand a future crisis.
Borrowing to build
Governments tend to consider infrastructure spending as an investment in the future of their
country and spread the cost of any project over its potential lifetime, minimising as far as
possible the immediate financial implications of any given scheme.
There are good reasons to suppose State spending on airports, roads, railways or similar
projects are beneficial to the economy and that, without government support, they would
never get off the ground. Even so, there is every likelihood that, in future, the private sector
will be expected to fund, run and profit from such investments.
Previous attempts to generate private sector investment have had only limited success. In
the UK, Private Finance Initiatives have failed to deliver value for taxpayers’ money and
some have been excessively costly. On the other hand, leaving investment entirely to the
private sector can lead, as in the case of the M6 Toll Road, to loss-making, under-used
resources.
New methods of funding and managing infrastructure projects will be developed to transfer
the risk and reward to the private sector as governments seek to evade financial
responsibility for the projects they want to develop.
The short-term impact may be beneficial but in the long run the likelihood is that
governments will still be forced to step in and bail out failing projects.
What’s a government for?
Individuals and businesses are often castigated for attempting to minimise their tax bills.
While avoidance is legal and evasion illegal, there is a grey area where critics talk of what is
morally, rather than legally, unacceptable.
The argument tends to assume government spending is, by definition, morally good. The
debate tends to ignore the question of what governments do with all the money they raise.
Is it necessary or desirable for a government to assume all the responsibilities it takes on? If
the twentieth century public spending boom has given way to twenty-first century austerity,
the next 25 years will see a re-examination of the role of the State.
In trying to limit their liabilities, some governments will cut back, if not abandon, support for
the arts and sport, business development, support for science and technology and other
activities which are not regarded as core to the role of the State in running the country.
The difficulty, as Der Spiegel says, is that the State ‘serves primarily one purpose: to justify a
government's existence. Many of the things for which cities, states and the federal
government borrow money turn out to be pure waste’.
The truth is that governments have a tendency to spend more and more money. And that
can only come, in one form or another, from the taxpayer.
One academic inquiry notes: ‘We have to provide Government with sufficient powers
(taxation, military, legal) to do the necessary things: national defence, courts, police and
enforcement of contracts and property rights. Once so endowed, the temptation to do more
or to take advantage is irresistible.’ (Centre for Global Liberty and Prosperity, 2011).
The same report says it is estimated ‘the core functions of Government – protection of
persons and property, national defence, education, monetary stability and physical
infrastructure – amount to no more than 15 per cent of GDP’.
It has become clear that most governments cannot continue to spend money as liberally as
they have in the past. Their levels of debt are already significant and interest rate rises will,
in some cases, make them crippling.
There are many ways the State could cut back on its activities. All have job implications, of
course, though there is plenty of evidence in the UK that a shrinking State allows for an
expanding private sector.
They’ve got a little list
In a democracy, the range of government activities will ultimately be determined by the
voters. And there is an irreconcilable tension between the desire for better public services,
on the one hand, and lower taxes on the other. This is illustrated by a recent Taxpayers’
Alliance (TPA) report calling for the abolition of entire government departments as part of its
campaign to cut government spending to 35% of GDP.
The TPA called for the closure of the departments for business; energy and climate change;
culture media and sport; and international development. It wanted the abolition of
‘pensioners’ perks’ like free TV licences and winter fuel payments; cutting the welfare cap
cut to £20,000; a £20 charge to see a GP and a £25 fine for a missed hospital outpatient
appointment, among a range of radical changes.
As a quid pro quo for these cuts, the TPA would have a single, simple rate of tax set at 30%.
The TPA said: ‘Getting spending under control is about much more than dealing with a tough
fiscal climate. Reducing public spending should be part of a big picture strategy: it would
mean lower taxes for families across Britain, less debt for future generations, and faster
economic growth generating prosperity for all.’
It is unlikely future governments will go as far as the TPA would like in cutting State spending
and lowering taxes. Indeed, it is quite possible spending and taxes will have to rise sharply if
governments do not act to reduce their commitments or reform provision for the care and
sustenance of the elderly.
Over the next two or three decades, the pressure on governments to rein in their spending
and stimulate economic growth with a low-tax regime will not lessen, while grappling with the
legacy of debts and commitments suggests an era of long-term public spending austerity.
Value for money
This will create new opportunities for the private sector to provide services which were once
the domain of the State. Political parties, and the voters, will have to overcome their
instinctive dislike of the idea that businesses could profit from such things as caring for the
elderly, providing health services, or educating children.
Yet the private sector already offers many of the services also provided by the State. The
conflict is really only over the price to be paid and the private sector does not have an
unblemished record.
One of the big challenges for civil servants is to ensure they achieve the best possible value
for money. It is clear that, in the past, they have failed to do this.
Governments have a poor record when it comes to obtaining real value for money when they
enter into a contract, whether for a new computer system, a new aircraft carrier or a new
medical centre.
Examples of waste are legion. Almost every country has them. These can be modest sums
spent on trivia (expensive lunches, lap dancers, children’s parties) or enormous amounts
disappearing down a black hole.
Some of this waste is the result of fraud. Much more is the result of incompetent
management of complex projects, lax procurement methods and ineffective contractual
agreements. Governments regularly struggle to obtain fair value for their money.
This is, in some cases, the result of failures within the civil service in specifying their
requirements in the first place or adding new requirements once a scheme is under way. In
others, it is the result of contractors taking advantage of their client’s naivety. Mostly,
however, it is simply the result of poor financial management.
How not to spend money
The UK’s National Audit Office (NAO) regularly holds government departments to account. A
cursory search of its website highlights some of the waste and incompetence which dogs
government spending.
In June 2014 the Auditor General qualified the accounts of the Department for Work and
Pensions 2013-14 ‘owing to the material level of fraud and error in benefit expenditure’.
Overpayments were estimated at £3.3bn partly offset by underpayments of £1.4bn.
Even HMRC, responsible for collecting the taxes to pay for public spending, is less than
competent. Reporting on the department’s contract with Capgemini over the Aspire IT
programme, the NAO ‘estimates that, by the time the contract ends in June 2017, HMRC will
have spent £10.4 billion compared to the £4.1 billion used when evaluating Capgemini’s bid’.
Culture change
Public spending in Britain is relatively tightly controlled and corruption is rare. This is not
necessarily true around the world. The EU, for instance, can rarely account for all the money
it spends and is frequently at the centre of fraud accusations (a House of Lords report in
2013 estimated fraud in the EU totalled £4bn).
In such circumstances, it is difficult to support the argument that individuals or businesses
have a moral duty to pay their taxes whatever a government wishes to do with the money.
The morality must work both ways – if it is a moral duty to pay taxes, it is at least as much of
a moral duty to make sure that every penny is spent wisely and well.
The ‘leakage’ of taxpayers’ money by governments is as great a scandal as the taxavoidance measures taken by some multinationals or wealthy individuals. It is hardly moral
to demand taxes and then – whatever the policy, whatever the party responsible, whatever
the popularity of the expenditure – squander billions without any significant consequences
for those responsible.
As the NAO says: ‘The financial consequences of decisions need to be understood at all
levels in the organisation … Accounting Officers of major departments, who are generally
not finance specialists, do not always see that financial management is an essential part of
effective management.’
In the next two or three decades, many governments will be forced to grapple with their high
levels of debt and inevitable increases in demand for existing services.
The first step they must take is to ensure all the money they spend is properly accounted for,
that they obtain the best possible value for it and it is delivering the benefits expected of it.
This is a massive challenge to the way public spending has been handled and requires a
dramatic culture change across civil services and other taxpayer-funded organisations,
irrespective of the political parties or policies followed at any particular time.
If taxpayers do not believe their money is being spent carefully, they will become
increasingly reluctant to trust governments with it in the first place.
While governments will be forced to become more resistant to demands for additional public
spending, because they are simply running out of resources, their first task must be to spend
what they have effectively.
This cannot be achieved until they recognise the central importance of qualified finance
professionals in all their activities, to provide taxpayers with the assurance their money is
being spent wisely and well.
What ICAEW chartered accountants say about debt and public spending:
‘They say you have got to run a football club like you run a business. You have got to
run a country like you run a business.’
‘We need to have more clarity about what government is going to provide for us over
our lifetimes and what it’s not going to provide. Most people are just closing their
eyes and hoping it will be OK. We need something like the Armed Forces Covenant.’
‘If a soldier has been paying into his pension for 30 years, it’s not his fault there’s
nothing there.’
‘I have never seen a sustainable economic model where more than half the population
is on benefits.’
‘They have been trying to make a broken welfare system work better rather than
replace the system with something dramatic and radical.’
‘We should have government run more like a business with rolling three to five-year
plans. More services should be delivered by agencies or the private sector – for
instance, there is no reason why arts administration should not be outsourced.’