Are you ready for the national debate on the future priorities for public spending and public services? Gordon Brown, the chancellor, announced it in the Budget and the Treasury still promises events will unfold in the autumn. Such a debate, if it is meaningful, is sorely needed. Decisions on the size and role of government should be taken in the open. Ministers can muddle through each year but the big choices are simply made by default.
Any rational debate on public spending must start with the facts. After two years of famine between 1997 and 1999, Mr Brown gradually turned on the public spending taps. The next financial year will be the eighth in a row with faster growth of planned public expenditure than the sustainable rate of growth of the economy. In 2007-08, the current plan is to spend £583bn or 43.1 per cent of gross domestic product, up from 37.4 per cent in 1999-2000.
We should be clear that this is not an unprecedented level of public expenditure. Total managed expenditure was close to 50 per cent of GDP in the 1970s, when government still built council houses and owned mining, gas, electricity, telecommunications and water industries. It was also higher in the high unemployment years of the early 1980s and early 1990s.
But strip away these mitigating circumstances for high past public expenditure levels and the end of the current period of public expenditure control will mark a cyclically adjusted record, one that is matched by historically high levels of taxation.
Britain’s problem is simple: the public show little willingness to tolerate further tax increases but the pressures for public spending increases continue unabated. The government’s priority areas of health, education and social protection account for 58 per cent of total spending and pressures in these areas are intense. Health budgets are rising worldwide on the back of elderly populations, new treatments and the fact that people wish to devote more income to health services as they become richer.
Education is also a luxury good with rapidly rising demand, not to mention the fuel added by the chancellor’s unspecified Budget promise to match state school expenditure per pupil to that in private schools. And social security budgets will be stretched in the next decade as the baby-boom generation begins to retire and the government battles to meet its target to eradicate child poverty by 2020.
Faced with incessant public spending pressures and an inability to raise taxes, everyone should consider where the public sector should cease its current provision. I have three broad suggestions that should form part of a real national debate.
The first is to replace tax-financed expenditures with charges for certain public services. Introducing user charges for previously “free” services would not be popular but would have the benefit of improving efficiency. User charges introduce efficiency into demand where they deter users who expect to gain less than the cost.
Concerns about equity of access to services need to be weighed against the efficiency gains. So the ideal candidates for user charging are public services that are either optional, heavily used free-at-the-point-of-use services with little social benefit or those demanded at least proportionally by middle- and higher-income families.
The Highways Agency is an obvious candidate, as its £6bn annual costs could be financed by road user charges. The same applies to the BBC, which could become a largely subscription service, reducing public spending by more than £3bn a year. University tuition has started its journey along the user charges route and could go further while there is scope to reconsider whether GPs’ visits should attract a fee.
The second broad category is cutting unnecessary government services. Good candidates to consider cutting or axing altogether in a genuine debate would include pensions for public sector workers, business support services, little-used rail lines, the child trust fund and identity cards.
Third is to cut the growth of compulsory transfers from one set of taxpayers to others. Social security payments are planned to cost £150bn in 2007-08 but are difficult to cut since they are so visible. To cut £5bn a year you need to find 5m people who would not complain too loudly if they lost £1,000 each.
Outright cuts are almost impossible but there are many opportunities for limiting expenditure growth over time. Most important is to think again about the government’s child poverty targets. Shovelling money to poor families has cut the proportion of children living below 60 per cent of average income but at the cost of worse work incentives for those families. Since employment offers the most lasting escape from poverty, effort should be focused in that direction rather than further large increases in benefits.
None of these options represents easy political choices. But they are the choices facing us if we want to keep taxation levels roughly constant over the next decade without a growing gap between the expectations for public services and their performance.
In my next column on August 18 I will assess how the comprehensive spending review is shaping up against these principles.
The writer is the FT’s economics editor