Sunday, April 05, 2009

That's What Happens When The Money Runs Out

I ain't got no money, honey

What have the following got in common?
  1. Warning of malnutritian as food prices soar - "Save the Children said inadequate benefit payments combined with massive price hikes for staples such as rice and sausages mean some families could not afford decent food. The warning comes as figures from The Grocer magazine show food prices have risen by nearly a fifth over the past year."

  2. Pupil numbers error hits college funds - "A catastrophic miscalculation of pupil numbers was blamed last night for unforeseen cuts in funding that have left state school sixth forms and colleges desperately searching for extra cash... The Department for Children, Schools and Families, under Ed Balls, introduced legislation to raise the education leaving age from 16 to 18. It also issued the “September Guarantee”, which promised a place in learning for every 16-year-old in England. Yet it failed to give schools and colleges the money they needed to make these reforms a reality..."

  3. Funding crisis caused by 'government incompetence' - "Further education colleges were encouraged to apply for funding to rebuild their sites. Projects costing £2.7 billion were approved for 79 colleges by the LSC, but that money did not exist. By the time they were notified, many colleges had already used their own savings, sold land or taken out loans at commercial rates to pay for the demolition of existing buildings, rehouse their students and appoint architects."

They are all examples of what happens when the money runs out. That's when fantasy policy commitments suddenly bash up against the harsh reality of frozen budgets. The results are almost always arbitrary, and can be highly damaging.

To cut or not to cut is no longer the question. The money has all gone, and public spending has to be slashed whoever is in power. The only question is how?

Unfortunately, in the highly technical jargon of fiscal policy, the current way is known as The Bad Way. Instead of taking a cold hard look across the whole expenditure budget, November's Pre-Budget Report (PBR) took the time-honoured easy option of axing capital programmes. Precisely which programmes is so far unspecified, but they will inevitably include vital transport infrastructure projects, and those aircraft carriers essential to our future defence.

Worse, fear of fessin' up to the ghastly spending truth has driven Gordo to abandon this summer's scheduled Comprehensive Spending Review (CSR). Which means the details of future cuts will remain shrouded in mystery until post-election.

We must hope Dave and George grasp the nettle. As we've blogged many times, we need an explicit medium-term strategy for reducing public spending as a share of GDP. And to be meaningful, it needs to be linked through to specific public service reforms, including:

  • Choice and competition in education - school vouchers and an end to state monopoly provision (hopefully, Mr Gove has this in hand)
  • Choice and competition in healthcare - a wholesale switch to the continental social insurance model (notably absent from current Tory plans)
  • Fiscal decentralisation - local taxpayers responsible for funding the bulk of local services
  • Reduction in universal entitlement programmes - including moving the state pension age to 70 soonest, and a squeeze on lone parent benefits

Simply cutting stuff that's easy to cut, and pro rating the residual pain across the whole shebang simply won't do.

Our current crisis is a real opportunity to enact real reforms. Reforms that will not just save money, but also deliver the improved public service outcomes we've been promised for so long.

PS So Darling has "admitted" that his most recent GDP forecasts were a tad optimistic. Given that everybody else knew - and said - as much at the time, you kinda wonder what his Treasury officials were thinking. Did they believe their Panglossian outlook? Are they that out of touch? Or were they lying to us, hoping we wouldn't notice? As we've said before, George's very first task will be to cleanse HMT from top to bottom. There's no way he can trust the current crew.

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