Despite five years of austerity pain, the United Kingdom is only halfway towards achieving the goal of eliminating the fiscal deficit. This is despite unemployment falling and growth reaching 2.6% last year. The underlying problems are not merely the continuing impact of the global banking crisis and bail-outs, but also the related collapse of tax revenues as well as long-term demographic pressures.
The Institute of Fiscal Studies’ director Paul Johnson recently told Radio 4 that his ‘magic number’ is half. He meant not that the Government’s job of tackling the fiscal deficit is half done, but rather that within a few years half of all government expenditure will go on pensions and the NHS. The impact of an ageing population is skewing public spending, leaving little slack for other services. This has been exacerbated by the coalition government’s protection of schools and overseas aid, as well as the NHS.
Consequently, whichever government is in office after the General Election, it seems clear that downward pressure will continue on other services – with the possible exception of the military, not least because of threats from Islamic militants and fears over Russian expansionism.
The outgoing government has set in place plans that represent what the IFS calls “the largest fiscal consolidation out of 32 advanced economies over the period from 2015 to 2019”. But given the waivers for education, health, aid and defence, some other services look set for a further battering. Non-pension welfare spending, local government, policing and justice will all be squeezed further. Transport will be under pressure, but ambitious plans for infrastructure spending, including HS2, HS3 and a new Northern motorway, may ease the pain.
When it comes to social security, the cuts have just begun. The IFS explains: “there has been no real reduction in spending on social security as the number of pensioners and the generosity of the state pension has risen, while rising rents and falling pay have increased pressure on the working-age budget.” Consequently, the likely focus in reducing welfare spend will be on cash limiting Annually Managed Expenditure. As this implies a lack of certainty for welfare claimants over how much benefit they would get if they fall ill or unemployed, these moves are likely to cause a political stir. Child benefit, housing benefit and in-work tax credits might all be targeted to achieve significant reductions in welfare spending.
Under Conservative Party plans, deficit reduction would be almost entirely achieved through spending cuts, rather than tax increases. Both the Liberal Democrats and Labour parties want a slower reduction in the deficit. The three parties have limited tax raising plans – including the Chancellor’s additional bank levy – but the IFS points out that historically governments introduce new taxes a year into their administrations. Labour has, though, said it will re-introduce the 50 pence tax rate, applicable on incomes above £150,000.
Speculating on how the next government will run the public sector is difficult because of the lack of detail in the parties’ plans. For example, only two of the Labour Party’s ten key policy commitments have a direct impact on public services management and expenditure – the promise to end NHS privatisation and the use of a mansion tax to fund the employment of more nurses. (It should be noted that analysts and the Conservative Party have challenged the extent to which a mansion tax would raise anywhere near enough money to provide significant extra income for the NHS.)
But this is less than half the story of what the next government would do. The likelihood is that there will be either another coalition, or else what former Liberal Party leader David Steel called “a confidence and supply arrangement” – with it (and perhaps other minority parties) supporting or
rejecting individual proposals put forward by the governing party on their merit, without sharing government.
Whether inside a coalition or outside, several parties are potential candidates for some arrangement with either the Conservatives or Labour in government. UKIP, the Scottish Nationalists, the Democratic Unionists, the SDLP, Plaid Cymru and the Green Party could all be in the mix. Sinn Fein is another party that may hold several Parliamentary seats, but without overturning its long-held abstentionist policy it would sit on the sidelines away from Westminster.
In each case, it is issues away from the management and financing of public services that are the priorities for these smaller parties. For UKIP and the Democratic Unionists, a commitment to an early referendum on membership of the European Union is a central priority, while both also favour stronger border controls. This might favour a Conservative government, though it is noticeable that the DUP often votes with the Labour Party in Parliament.
For the SNP and Plaid Cymru – and for Sinn Fein, if it could be persuaded to come in from the cold – it is an enhancement of devolved powers that would win them over. Here the Labour Party is in the stronger position. The SDLP would also favour greater devolution, but would support the Labour Party anyway, in most circumstances. All these minority parties – with the exception of UKIP – would also favour a less harsh austerity budget, particularly for the regions in which they are strong. This is also true of the Greens.
In addition, the SNP favours cuts to the defence budget, including scrapping the renewal of the Trident nuclear submarine programme. It opposes some of the current government’s welfare reforms, in particular the bedroom tax (which Labour is pledged to overturn). Labour seems a natural party to work with for the SNP and other devolved parties – though perhaps not within a coalition. Both Labour and the SNP have indicated difficulties with a formal arrangement.
UKIP, however, has policies that are probably completely incompatible with those of the Labour Party. It aims to radically cut taxes, reduce government grant to the devolved nations (while giving their Parliaments and assemblies more tax raising powers), scrap the HS2 rail line proposal, cut the number of university students, end subsidies for renewable energy, abolish the energy and culture departments and reintroduce grammar schools.
As a party that operates only in Northern Ireland, is strongly unionist and has a largely working class support base, the DUP would have difficulties in working inside any coalition government. Some of its policies are right of centre, while others veer to the left. The same could be said of other devolved parties, on which a new government may have to depend.
A period of political instability seems highly likely. And that is probably the most significant impact on the public sector of a hung Parliament.