Why running a budget surplus is the least of the Chancellor’s worries

This week at the Conservative Party Conference, George Osborne stated he wants the Government to be running a budget surplus in the next Parliament and that he can get there without raising taxes. Listening to that rhetoric you might think all is rosy in the Chancellor’s financial garden. Far from it, warns Public Finance’s Mike Thatcher

Employment is at record levels, the double-dip recession has turned out to be a Dallas-style bad dream and the deficit has been reduced by a third. Austerity will be over soon and we can all return to normality.

If only it were true. The reality is that austerity could be with us for a generation or more. For the public sector, in particular, things will never be the same again. June’s spending review (covering the 2015/16 financial year) gave an indication of what is to come.

Chancellor George Osborne managed to find an extra £11.5bn from down the back of Whitehall sofas, but pointed out that a further 144,000 public servants would lose their jobs.

Local government, ever the whipping boy, took its punishment once more with a further 10% cut. This comes on top of a 33% reduction in council budgets for 2011-2015. Osborne claimed Britain was moving from ‘rescue to recovery’, but continual decline might be a more accurate way of putting it.

According to the Institute for Fiscal Studies (IFS), Britain’s public services face the most severe spending cuts in 60 years. And the pain won’t be stopping any time soon: Osborne has penciled in further cuts of £25bn between 2016 and 2018.

Knowing where to wield the axe

Of course, we will have a new government by then, and the man who isn’t President Obama’s favourite R&B singer may no longer be chancellor. But whoever is munching posh burgers in 11 Downing Street will be forced to make some tough decisions if the deficit is to be brought under control.

Further spending reductions will be difficult to achieve, however, without causing permanent damage to the public sector landscape. The IFS believes an incoming government is likely to put more emphasis on tax rises – potentially £6bn – to make the targets achievable. So we will have a starvation diet for public services, while the Taxman takes away more of our disposable income. It’s not a great future for us or our children.

The IFS also questions the decision to protect some budgets – most notably those of health, schools, foreign aid and the state pension. Protection of such large numbers places huge pressure elsewhere and is leading to radical change in the shape of the state.

Local government, for instance, could find itself providing social care, planning decisions, refuse collection and not much more. Arts and sports budgets are becoming a luxury that many councils cannot afford, while libraries are increasingly reliant on volunteers.

Review some of budget protection pledges ahead of the 2015 election

Both the coalition and the opposition are likely to review some of their protection pledges ahead of the 2015 election. But this is difficult political terrain, with all the parties concerned about antagonising key constituencies such as the grey vote.

Shadow chancellor Ed Balls has already promised that a Labour government would take the winter fuel payment away from well-off pensioners. It won’t save a huge amount of money, but it’s symbolic in suggesting that universal benefits will be in the line of fire.

Similarly, both the Conservatives and Labour are in favour of some cap on welfare spending. This, again, may be more spin than substance. It’s unclear what the sanction would be if the cap were broken and big-ticket budgets – such as the state pension and jobseekers’ allowance – would not be covered.

Don’t be fooled – there are still grim years ahead

With public sector funding squeezed until the pips squeak, there will be attempts to manage demand, to encourage citizens to rely less on public services. This could be through nudge techniques or by introducing more charging.

Yet it feels like a losing battle. Demand for services is rising rapidly as we all live longer and expect more from health and social care providers. In the end, something will have to give.

The next Chancellor will have an unenviable task. Given the dire outlook, the 2015 election might be a good one to lose. Then again, it’s hard to see a good election to win in the next few decades.

Mike Thatcher is the editor of Public Finance magazine

Mike Thatcher is Senior Publications Manager at EY.