The Chancellor could take the advice of his opposite number, Ed Balls, and simply spend more to try to stimulate growth. But that would be an admission of failure.
The second option is to listen to Sir Mervyn King, Governor of the Bank of England, who has argued that failure to hit deficit reduction targets is acceptable, provided it is caused by external factors (such as the eurozone crisis) rather than by a failure to control expenditure. That is the ‘do nothing’ or ‘steady as she goes’ option.
There is a third option: to implement deeper cuts in areas which will have less impact on the economy (such as Whitehall administrative costs) in order to boost spending on programmes designed to kick-start the economy. Back in 2010, KPMG and Oxford Economics published a report on ‘Meeting the Deficit Challenge’. We argued then that the Chancellor needed to cut decisively, concentrate on cutting current spending, not capital, and re-engineer government. He deserves credit for having taken the first of those three steps, but his track record on the others is much less good: capital spending has borne the brunt of the cuts and there has been a distinct lack of progress in reforming the public sector.
There is an obvious answer, but it will require political courage and will be challenging to implement: the government needs to reduce current spending still further, turn this to advantage by taking the opportunity to drive fundamental reform of public service delivery, and invest the money that is saved in capital programmes such as housebuilding, transport infrastructure and high-speed broadband.
Within Whitehall, Michael Gove’s Education Department is leading the way, with a radical proposal to reduce civil service numbers and replace the old hierarchical structures with a more flexible, project-based approach to policy design and implementation. The question is whether the rest of Whitehall will be brave enough to follow suit. As far as the wider public sector is concerned, the government already has a blueprint for action – the ‘Open Public Services’ white paper. What is disappointing is government’s failure to put the proposals into practice to date. Implementation of the key principles set out in the white paper – particularly the opening up of public services to competition – needs to be made a priority and directed from the centre of government.
So look out for the following announcements in the Autumn Statement: further cuts in Whitehall budgets, a switch from current spending to capital and a commitment to implement the principles set out in ‘Open Public Services’. Is the Chancellor likely to grasp the nettle in all three areas? Probably not, but even one or two out of three would be a start.
By Alan Downey, Head of Public Sector, KPMG