Test 15 February, 2017

How will we pay for the welfare state? (III)

This article was first published in Reform’s 2017 Annual Conference brochure. To read more articles, click here.

All decisions have consequences and the financial consequences of public policy decisions become apparent when we start to crunch the public-sector finance numbers.

The national debt is now over £1.5 trillion or 83 per cent of GDP and expected to grow to under £2 trillion in the next five years, the highest level of public indebtedness ever seen. And the consequences of policy decisions on areas such as pensions provision for public sector employees, how to manage clinical negligence in the NHS, and the cost of cleaning up the nuclear industry only serve to increase these numbers. When these items are included, total current liabilities, today, already exceed £3.5 trillion, or in simple terms, they are at 191 per cent of GDP. This is a staggering £130,000 per household.

So, how does this impact on future generations and on services that we receive? If government continues to manage in the way it currently does, then the future doesn’t look good. The current policies of only managing current spend are not working. They are increasing our debt and the amount of interest that we pay on a day-to-day basis, and this is effecting our economic growth and welfare. We believe that the government needs to take a more business-like approach to dealing with liabilities. It needs to think more about future spend and the associated risks of out-of-control public expenditure and the increased impact it has on services like health, education and social welfare.

With debt at such high levels, it is imperative that the Government has an effective strategy to manage its exposure to the associated risks. For example, it could consider increasing clinical staff levels in high-risk areas, to increase quality of care which would in turn reduce the overall bill for clinical negligence (currently set at £29 billion for clinical negligence claims).

Similarly, the majority of businesses have moved employees to defined contribution pension schemes, yet government staff are still on defined benefit schemes. This is expensive and risky and the cost falls to the public purse with estimated future costs calculated at approximately £1.5 trillion (similar to the national debt figures). Using public money to fund runaway growth in civil service pensions means less money for other much-needed services.

The national debt is higher than at any time, other than the aftermath of a major war – the UK Government last published a debt management strategy in 1995. A lot has happened since then, so a refreshed strategy is long-overdue. The Government has always taken an economist’s view of public finances, but we believe that it’s now time for it to take an accountant’s view and bring a more business-like approach to managing public finances.