The CBI is calling on the Chancellor to ensure his Pre-Budget Report delivers a credible plan for balancing the public finances by 2015-16, two years earlier than planned, in order to boost investor confidence and get the UK on the path to recovery. But it is warning that the government will need to take an extra £120bn out of current spending plans to balance the books.
The UK’s leading business group says £50bn will need to be found between now and 2013 to allow for a slower economic recovery than the government is predicting, and a further £70bn will be needed after 2013 in order to balance the budget by 2015-16, rather than by 2017-18 as set out in the April Budget.
The CBI is setting out its strategy for getting the UK on the road to sustained growth ahead of the Pre-Budget Report. It involves bringing the public finances back into balance, a radical re-design of the way public services are delivered, and introducing a range of low-cost measures to position the economy for recovery.
If the government adopts these proposals it could avoid large tax rises and crude spending cuts at a time when the economy is still fragile, while at the same time delivering high-quality public services.
John Cridland, CBI Deputy-Director General, said:
“We are facing the biggest peacetime deficit in our history, and it is not simply going to disappear with the economic recovery. That is why we need a fully credible plan to convince financial markets and taxpayers alike that the public finances will be restored to health.
“Our calculations suggest that an extra £120bn will need to be taken out of current spending to achieve budget balance by 2015-16. Such savings cannot be achieved by tinkering at the edges, but will require radical public sector reform.
“We have identified how the required savings might be achieved by re-engineering the ways in which public services are delivered. By introducing new technology and competition, eliminating waste and inefficiency, and tackling unaffordable pensions and pay head on, we can avoid crude cuts to frontline staff and the vital services on which we all depend.
“Our proposals are not exhaustive, but they are evidence-based and illustrate the sorts of savings that could be achieved with strong political will.
“Raising taxes and cutting capital spending when the economy is still fragile would hurt families and businesses when they can least afford it. The only sensible option is to try to do more with less.”
Balancing the public finances
Looking at the proposals to rebalance the public finances in more detail, the CBI is calling for:
- the budget to be balanced by 2015-16, two years earlier than currently planned, in order to underpin investor confidence in the UK.
- capital spending to be protected as it is vital to support future economic growth.
- a more rigorous fiscal framework, including the creation of a Fiscal Policy Committee, answerable to Parliament, to scrutinise the government’s public finance and economic forecasts, as well as the underlying assumptions.
Commenting on the proposals, Ian McCafferty, CBI Chief Economic Adviser, said:
“We estimate that a further £120bn in savings will be required over and above existing government plans. Such savings need to be achieved, not through increasing taxes, nor by further hitting public investment in our economy, but through restraint in current spending, by driving up productivity and efficiency across the public sector.
“The skills and experience necessary to achieve reform in the delivery of public sector services, such as change management, process re-engineering, culture change and communication, are specialised and rare throughout the economy, but can be found to a greater extent in the private sector. The public and private sectors will need to work closely together if these much-needed reforms are to be delivered.”
Public Sector Reform
Despite huge amounts of investment, productivity within the public sector has fallen over the last decade. The CBI believes radical public sector reform could reap huge savings for taxpayers, while ensuring the public can benefit from high-quality services.
The CBI’s proposals are outlined in detail in its Public Services Strategy Board paper, ‘Doing more with less: a credible strategy for restoring the public finances.’ The examples are not exhaustive, but a list of evidence-based savings using proven techniques that could be applied more widely and in other areas.
The CBI is proposing:
- radically re-designing the way public services are delivered, including making use of new and proven technologies, as well as increasing competition, which could achieve £63bn of savings by 2015-16.
- improving workforce management by adopting good private sector practice, including better management of staff sickness and temporarily freezing the public sector pay bill. This could yield £27bn savings by 2015.
- allowing the private sector to provide non-core activities, such as back-room functions. This could save £30bn by 2013-14.
- cutting waste from within government could save a minimum of £16bn by 2015-16, while pooling local authority budgets to avoid duplication of services could reap further savings.
Mr Cridland added: "Just as families and businesses are tightening their belts up and down the country, the government must decide what it can afford to deliver, and focus on must-haves, rather than nice-to-haves.
"We want every government department to ask itself five key questions every time it is thinking about parting with taxpayers' money: Is this something government needs to continue? Is this something government can afford to continue? Is this something that could be done more efficiently? Is this something that could be delivered better by the private or third sector? Is this a service that can be re-engineered to deliver a better outcome?
"If this kind of thinking were applied across the public sector, our calculations show that huge savings could be made for taxpayers, while improving or maintaining the quality of services.”
Measures to support the economic recovery
Given the fragile state of the economy and the challenging environment in which businesses are operating, the government should also take some short-term steps to ease the pressure on firms. This will help support business investment and jobs.
Among the measures the CBI is calling on the government to include in the Pre-Budget Report are:
- maintaining and improving the research and development (R&D) tax credit scheme to encourage innovation, particularly in low-carbon areas.
- making the costs of raising equity tax deductible for SMEs and equalising the tax treatment of debt and equity to help capital-constrained small firms.
- reconsidering planned changes to pension tax relief system for higher earners which will weaken incentives to save for retirement and could further undermine confidence in the pensions system.
- making regulatory changes, such as extending the Pension Regulator’s ten year trigger and de-regulating small mergers.
- reconsidering a number of planned business tax increases, which will hit firms at a time when the economy is still vulnerable, such as in National Insurance, landfill tax, Air Passenger duty and the timing of the VAT rise.
Mr Cridland added: “With firms still facing challenging conditions and credit still not flowing freely around the economy, there are a number of relatively low-cost measures the government could adopt to help.
“Delaying some business tax rises that are in the pipeline and making some sensible regulatory changes would give businesses the headroom to recover, so they can help drive economic growth and support jobs.”