Title

This week's collapse of Lehman Brothers, although a Wall Street disaster, can only tighten the screws on the UK's deteriorating public finances. While the Comprehensive Spending Review was anticipated last year by local authorities with some dread, its outcome was at least no worse than expected and provided some financial stability for three years. But since then, the economy has taken a battering, the public deficit figures are worsening as tax revenue declines and all the signs are that a new squeeze on public spending is on the cards. Earlier this week Treasury and Bank of England forecasts predicted that public borrowing over the next three years will be £65bn higher than Alistair Darling's forecasts last March. Shortfalls in tax revenues will raise public sector net debt by 3.4%, breaking the Government's own fiscal rules. To complicate matters, we are in a general election cycle that will continue for a further 18 months until May 2010. Since it could well determine the face of British politics for another decade, the stakes are high and no political party wants to be seen raising taxes. Indeed the parties are moving in the opposite direction. At the LGA David Cameron said the ‘cupboard is bare', implying there would be no extra cash for public services. Now the Conservative mantra is that the finances are in such a parlous state, cuts will have to be made outside health and education. After signals that it was downplaying its tax-cutting agenda, the Tory leadership is back to offering cuts. Not to be outdone in their bid to hold marginal seats exposed to a Conservative landslide, the Liberal Democrats have also adopted a tax-cutting agenda. None of this is good news for public sector managers already grappling with the rising cost pressures associated with the declining economy. The Government is under pressure to reduce the public sector deficit yet its opponents are offering tax and spending cuts to an economically bruised electorate. Brown and Darling are therefore unlikely to be attracted to a policy of maintaining existing public spending commitments and yet reducing the public sector deficit by increasing taxes. The CSR looks increasingly ripe for adjustment – downwards. Michael Burton Editor, The MJ

Title

FINANCE

Public finances face the squeeze

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