CIPFA London Division Delivering the Deficit Reduction : Rising Phoenix or Dead Parrot?

1. CIPFA London DivisionDelivering the Deficit Reduction: Rising Phoenix or Dead Parrot? 11th October 2011

2. Welcome & introductions Peter Gilmour Chairman CIPFA London Division

3. \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

4. Delivering Deficit Reduction- how much and for how long? Tony Travers London School of Economics

5. 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…

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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?

15. 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…

16. Delivering Deficit Reduction- how much and for how long? Tony Travers London School of Economics

17. \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

18. Short-term demands and long-term needs. Can they both be met? Simon Hughes Deputy Leader, Liberal DemocratsMP for Bermondsey and Old Southwark

19. \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

20. 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

21. The climate is tough out there …

22. 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

23. 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

24. Two big issues • Can we get the growth to fund public services? • Can we manage the new risks that come with localisation?

25. 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.

26. LGRR - What councils are looking for • Stability and predictability • Resources to keep pace with need • Greater autonomy • Reward for successful performance

27. 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.

28. 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

29. 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

30. 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

31. 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

32. \Agenda Now Panel Debate 12:00pm Buffet Lunch

33. Panel Debate

34. CIPFA London Divisionwww.CIPFALondonDivision.org.ukThank you for attending