Public services

Quick summary

Successive governments have not been able to balance what they spend on public services with what they can raise in taxation. Although expenditure has declined in some areas, it has grown in others where there is growing demand.

Traditionally, governments faced with these kinds of budget ‘blackholes’ have borrowed to balance the books. But the UK’s sizeable public debt means there that it can no longer continue borrowing to fund this deficit.

This means the UK is left with an unpalatable choice: either it needs to cut spending or raise taxes.

Since the 2008 financial crisis, the UK has attempted to cut spending in all but a few ring-fenced areas. This period of austerity has been acute, and future savings from cuts at a departmental level do not look feasible without radically rethinking what services the state should deliver and how.

Raising taxes, particularly on middle and lower earners, has typically been highly politically unpopular, but may now be necessary for the sustainability of the public finances.

Zooming out on the public finances emphasises a stark reality – over the last century public spending has tended to outstrip tax revenues. This pattern has become more consistent since the 1980s; tax receipts have hovered at around 36-37%, while spending has typically been a couple of percentage points higher. The last time expenditure dipped below tax revenues was in the early 2000s.

Looking at the aggregate masks substantial variation in the trajectory of spending by policy area. Some, such as health, have had significantly more resources devoted to them over time; public spending on health was less than 3% of GDP in the 1950s, but today is more than 7%.  Others have gone in the opposite direction: defence spending stood at 5% of GDP in the mid-1980s, but now rests around 2%, the minimum level the government is committed to as a member of NATO.

The fact that these public finance patterns are quite settled indicates that they reflect the preferences of the electorate: we want higher health and social spending, to some extent at the expense of other public services, but there is also little appetite for higher taxes. The outcome has been a relatively consistent budget deficit.

The first question is whether this constitutes a problem. The current government clearly thinks so, and has committed to reducing the deficit to zero. Even if this looks unduly stringent, the widespread view seems to be that a deficit any higher than 2-3% of GDP would make the UK economy vulnerable to an economic downturn or interest rate rises given the size of the public debt, which sits at almost 90% of GDP.

This leaves politicians with two options for putting the public finances on a sustainable footing over the long term: reduce spending or raise taxes. The first option is the one that has had the greatest appeal to the government so far: over 80% of fiscal tightening since 2008 has been achieved through reductions in public spending. This has not been without cost, though. The number of police officers in England and Wales fell by 14% between 2009 and 2016, and safety in prisons has been flagged as a major concern, for example.

Rather than gradually chipping away at public service budgets, it may be time for more systematic thinking about how spending could be reduced. Examples might include ending the triple lock on pensions, scaling back the NHS to a set of core services that are free at point of use, and the more widespread use of co-payments, which are already in place in areas including higher education and social housing.

The politically unpalatable option of asking voters to pay more in tax also seems unavoidable. This would have to involve higher taxes across the board if it is to generate the revenues required; the top 10% of earners already account for almost 60% of income tax revenues, so squeezing them further is unlikely to generate much more cash. Stamping out tax evasion and avoidance, another favourite of all the political parties, is also likely to have only a marginal impact on total tax receipts.

Politicians therefore need to make the case for higher taxation – explaining clearly what taxes are spent on and how much money is needed could help government to strengthen the legitimacy of taxation in the eyes of voters. There is also evidence of subtle shifts in attitudes to taxation that could be capitalised on; almost half of respondents in the most recent British Social Attitudes Survey wanted the government to tax more and spend more, the highest proportion for a decade.

The onus is on all political parties to recognise that hard choices on the future of taxation and spending need to be made, and that it is up to them to engage voters in an honest discussion about the trade-offs they will inevitably involve.

 

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Video

Ryan Shorthouse, Director of think tank Bright Blue, discusses public service reform and how academics can better engage with contribute to policymaking.