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CIPFA London Division
Delivering the Deficit Reduction: Rising Phoenix or
Dead Parrot?11th October 2011
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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
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…
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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