Following Steve Bundred's warnings on public spending Robert Hill looks ahead to difficult times – but finds some cause for optimism Steve Bundred has been chief executive of the Audit Commission for more than five years. And, unlike his predecessors, he has mostly operated in a low-key way. Not for him the swashbuckling style of John Banham, the fierce forensic advocacy of Howard Davies, or the sharp media profile of Andrew Foster. So, it was a bit of a shock to wake up one morning in February and hear Mr Bundred featuring in the lead story on BBC Radio 4's Today programme, and in The Times newspaper, with his warning that public debt was hitting Armageddon levels. Mr Bundred's media outburst seems to have been driven by a concern that managers were not facing up to what was going to happen to public spending over the next few years. He has a point – up to a point. The next spending review was always going to be tough, but latest projections indicate that finance directors would do well to put in an early order for hair shirts. In the pre-Budget report last November, the chancellor announced another £5bn of public sector efficiency savings in 2010/11, and a cut in the capital budget of the NHS. These reductions will carry over into the next spending review, and together, they will cut the level of public spending as a share of national wealth (GDP) from 43% to 41.5%. That may not sound a lot, but... in the three years starting from April 2011, overall public spending will increase by a measly 1.1% in real terms. That is the lowest increase since 1998/99 when Labour were still keeping to the previous Tory spending plans. At least it is still an increase over and above inflation, you might think. Not so fast. First of all, capital spending, which has seen welcome and sustained increases under this Government, is being frozen in cash terms at 2010/11 levels, equivalent to negative growth of -2.4% over the three years. So, funds for housing, schools, transport and hospital-building projects will be harder to come by. Second, much of the 1.1% increase will go on what is termed ‘annually managed expenditure' (AME) – covering debt interest and demand-driven spending, such as benefits, tax credits and pensions. Departments and services including health, education, social care and local government only get their allocation after provision has been made for AME. The widely-respected Institute for Fiscal Studies reckons the demands of AME will be such that departmental budgets will get a zero increase in real terms! And even then, the bad news does not end. The Government will not distribute the misery evenly across all services. Some departments, such as International Development, may be relatively protected. But the NHS and education look like having their toughest settlements for a long time. The prospects for transport, policing and local government look grim. And remember, the Conservatives are saying they don't think Labour are being tough enough on public spending. If interest rates and inflation stay low, the situation will be that bit easier to manage. But there will be no avoiding some really tough decisions. In this respect Mr Bundred is absolutely right to warn public sector managers to plan for lower spending now, rather than thrash around and make panic cuts in a couple of years time. Where Mr Bundred's Armageddon imagery may prove somewhat excessive is in relation to overall levels of government borrowing and debt. Yes, they are high at present, but if we start to tighten fiscal policy too soon – ie, cut spending – then we will just reinforce a recessionary cycle. Already, we are seeing councils adding to the unemployment total by laying off employees. Second, as Mr Bundred should know from having lived through the 1970s and 1980s, the way most countries deal with their debt hangover after a recession is to grow their way out of it. Rising GDP increases the tax base and tax yields. That is how the UK was able to repay the 1970s IMF loans sooner than projected. Third, I suspect that much of the bank-related debt will, within the period of the next spending review, become an asset. Look at how quickly much of the loan to Northern Rock has been repaid. One can foresee the Government selling off its stakes in the banks and realising substantial sums which can be used to write off debt. So the country faces a serious financial situation. Public managers should plan for a harsh spending period. But the Audit Commission should beware of dabbling in broader policy issues and becoming an unwitting pawn in the political argument about the ‘right' size of the public sector. Robert Hill is a former adviser to PM Tony Blair, and now works as an independent policy analyst
