David Willetts is a Member of the House of Lords
John Healey arrives at the Treasury facing a serious gap between the taxes we can afford and the public spending we want. The latest report from the independent Office for Budget Responsibility looks at public spending, tax and borrowing out to 2075. It shows there is a real danger of public debt growing to crisis levels. If policies don’t change public borrowing and total debt really could get out of control.
There are deep trends behind this. First: demographics. We were in a benign period when the proportion of the population aged 22-64 was growing. These are the people who pay the taxes and don’t collect require much public spending which tends to go to the young and the old. The trend was favourable for Margaret Thatcher and indeed Blair too – the proportion of the population of working age rising from a low point of 52.5 per cent when Mrs Thatcher came into office to a high point of 57 per cent in 2007 when Blair left. There were not many pensioners because the birth rate was low between the wars. And the post war baby boom meant a surge of young workers. That has all now gone into reverse.
2007 is a key date for another reason. That was the start of the financial crisis and Britain’s longest period of low growth on record. So rising public spending pressures coincide with less resources.
Health care was and is the biggest driver of increased public spending. 90 per cent of the Government’s planned increase in spending over this spending review period goes to health and social care. The OBR forecast health spend will grow from 8 per cent to 13 per cent of GDP over the next 50 years. That is partly because there are more old people. But it is also driven by poor health overall – more obesity and genuine problems with the mental health of younger people shown in the rise of “deaths of despair”, alcoholism, drug abuse and suicide.
After the financial crisis interest rates were unusually low for 15 years. That helped hold down public spending. But now another big driver of increased spending is higher government borrowing costs. In the last few years they have shot up to be the third biggest item of public spending.
The media focus is on benefits spending. It does need to be brought down though actually working age welfare has grown from roughly 4.8 per cent of GDP in the mid-eighties to 5.1 per cent today. Pensioner benefits have grown more – from 5.1 per cent of public spending then to 5.9 per cent today. The OBR warn that the triple lock, even partly offset by increased pension age, could take state pension spend to 9 per cent over the next fifty years.
The big offset has been the fall in defence spending after the collapse of the Soviet Union. With new threats everyone recognises it now needs to rise. The new Chancellor certainly does.
A prudent policy would be to run a budget surplus of about 1 per cent on current public spending with borrowing only for capital and that controlled too. That could get us into a virtuous circle of bringing down the debt and bringing down interest costs. It is achievable if some tough public spending decisions are taken. The OBR uses existing policy for its forecast though with some helpful interpretations such as that the pensions age rises to 68 in the late 2030s which is close to what David Gauke announced as Work and Pensions Secretary but has not been confirmed since.
Benefit spending does need to be controlled. The triple lock is the most egregious example of excess spending on benefits and has to go. Pensions are the biggest single item of benefit spending and their costs have to be brought under control. There are also potential savings from tightening access to disability benefits.
There are other options too which are identified in a recent report from the Resolution Foundation. Tax revenues from fuel duties are falling given the politics of rising fuel prices and also the shift to electric vehicles. One of the main costs of the shift to net zero is the loss of emissions-related tax receipts: there needs instead to be more tax per mile of car use. The cost of Government borrowing could also be reduced: the Bank of England is selling too many gilts – pushing down the price and so pushing up interest rates.
Andy Burnham is about to face the realities of these pressures. The Conservative opposition also faces them. There seems to be a revival of interest in the old battle of Wet v Dry at the moment. The Wets I remember were the ones who did not like tough budgets and wanted to spend more without taxing more. They wanted expensive spending commitments with lightweight promises for offsetting savings which were never properly costed or rested on vague promises to generate more growth to pay for them. By contrast the dries embodied Margaret Thatcher’s stern methodism.
I remember from my days in the Treasury Geoffrey Howe’s budget of 1981 combining tax increases and further public spending cuts (Conservatives were already holding down the basic pension by linking it only to inflation). I think of Margaret Thacher telling Conservative candidates in the run-up to the 2005 Election that their priority should not be tax cuts but bringing down public borrowing. I remember George Osborne telling the party conference in 2008 that “the party is over” and committing to bring down public borrowing and following that up with the VAT increase when we entered Government in 2010.
More recently it is Rishi Sunak correctly reversing the expensive Lib Dem policy, implemented by the Coalition, of raising personal tax thresholds to take people out of income tax. The Coalition’s tough spending savings could have got us to a balanced budget without that expensive offset. Taxes can be reformed with a lower burden on employment and work if there are increases in other areas. And over time it should be possible to bring down the tax burden. But that has to be earned by sustained control of public spending across a range of departments.
Fiscal conservatism should be at the heart of Conservatism. You can’t get more dry than that.