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CIPFA London Division

Delivering the Deficit Reduction: Rising Phoenix or

Dead Parrot?11th October 2011

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Welcome & introductions

Peter GilmourChairmanCIPFA London Division

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\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 TraversLondon 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)

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

UK’s relatively robust position…

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 ‘set-aside’) by the government

Council tax ‘freeze’ is a populist, but anti-localism 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-in-a-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 TraversLondon School of Economics

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\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

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Deputy Leader, Liberal DemocratsMP for Bermondsey and Old Southwark

Short-term demands and long-term needs.

Can they both be met?

Simon Hughes

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\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

Date www.local.gov.uk

Will local government finance reform make life easier for local authorities?

Stephen JonesDirector of Finance and Resources, LG Group

11 October 2011 www.local.gov.uk

The climate is tough out there …

Local authority funding

20

22

24

26

28

30

2010-11 2011-12 2012-13 2013-14 2014-15

£bn

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

CLG Core funding GDP deflator

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

• 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

2012-13 2013-14 2014-15

Estimated NNDR yield 23.7 24.8 25.9

CSR Formula Grant + AME

23.9 23.7 22.4

Difference (0.2) 1.1 3.5

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

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\Agenda

Now Panel Debate

12:00pm Buffet Lunch

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Panel Debate

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CIPFA London Division

www.CIPFALondonDivision.org.uk

Thank you for attending