Long-term lessons

With the results of May’s elections digested, the end of the current parliament has come into sight. So begins what will be one of the longest ‘long’ general election campaigns for decades. But on the policy issue which has shaped this parliament – the fiscal deficit – there is still a long way to go.

Should it form a government in 2015, Labour needs a new way of addressing the spending choices that will dominate its agenda. Chris Leslie’s speech at the ICAEW on long-termism last week added more clarity to the opposition’s nascent approach and contained some encouraging signals about the principles an incoming Labour government would apply to rebalancing the public finances.

This is welcome development, not least because (as the chart below from the IFS illustrates) around half of the planned deficit reduction remains incomplete.

And if there is one lesson to take from the last four years, it’s of the importance of a credible and achievable plan for reducing the deficit sustainably over time. Rather than salami slicing, government should plan to reengineer spending in order to achieve social outcomes and manage known economic and social trends in the future.

In contrast to this, the Coalition’s approach been an ad hoc one, leaving more and more of the burden of deficit reduction for the next parliament (as the graph below from the IFS shows).

Five points from the Shadow Chief Secretary to the Treasury’s speech last week point to the beginnings of an alternative approach.

 A longer-term perspective

An obvious point perhaps, until you give thought to how little room there is for the long-term during the public spending process. Although some will accuse a call for greater long-termism as cover for avoiding difficult immediate choices (and there are many), it is nevertheless vital if the next government is to ensure that very difficult decisions are not poorly made ones.

Outcome-based priorities

To do this the next government will need to switch its focus much more to outcomes. The speech last week recommended that the ‘Treasury must improve its partnerships and look at the real world outcomes that people care about’.

Especially at a time of restraint, decisions should be made in the context of governments’ long-term ambitions for the outcomes of public spending. In practice that means budget holders should work back from the outcomes they wish to achieve. In many cases this will entail a much greater degree of ministerial collaboration than obtains today, as the real world outcomes that people value do not fall within artificial boundaries of government departments.

A return to multi-year spending reviews

The spending review is a government’s opportunity to take an overall view of the balance of spending, outline how it intends to allocate expenditure over years and agree what it will deliver. It underpins a long-term perspective in the public finances.

In contrast to the single year ‘Spending Round’ in 2013, it is welcome that a 2015 Labour government would return to multi-year spending reviews. But the party will need to consider how they will function alongside five year fixed-term parliaments.

One way suggested in the final report of the Fabian Commission on Future Spending Choices is that that the next government carries out an initial 2015 spending review on a three year basis, with additional guidance for spending in the following two years. Under this plan, the review would set out definitive settlements for three years (eg. 2016-17 to 2018-19), as well as a rolling capital investment budget for a five year period so major investments could be planned over the long term. As Leslie indicated last week, ministers could also consider setting indicative current spending totals for the following two years to give budget holders the ability to plan ahead.

Returning to a medium-term cycle of spending reviews would only be a step towards more long-term thinking though. The Fabian Commission also recommended draft spending plans for consulation and a ‘long term expenditure statement’. The latter would promote long-termism by setting out the anticipated direction of travel for spending over decades. It would act as a reference point to show how a department’s budget and objectives contributed to the government’s long-term strategy as a whole.

Getting serious about early intervention

A ‘long term expenditure statement’ would also act as a driver for collaboration. By providing a link between the medium and long term in the public finances, it would encourage ministers to consider the interaction between budgets, particularly instances where one department’s cost cutting measures create liabilities for another in the future.

This function would be especially important to another principle emphasised in the Leslie speech, early intervention and prevention. In the context of long-termism, a stronger focus on early intervention (policies aimed at ameliorating the causes rather than symptoms of social problems) should first and foremost act as a mechanism to strategically reorganise public spending.

Too often though the wisdom of ‘prevention is better than cure’ has struggled to gain traction at the heart of government. So if it returned to power, Labour may want to consider a more prescriptive approach: budget holders could be required to switch a proportion of their annual spend away from acute interventions, so that a pool of resources dedicated to early action accumulated over the life of a parliament.

A coordinated approach

Finally, the ICAEW speech noted that ‘long-termism is about more than an approach to public services and budgets’. Perhaps an obvious point – different policy levers are often alternative means of achieving the same ends (and necessarily interact with each other). Nevertheless, it is remarkable how often different dimensions of government policy pull in competing directions.

So a serious approach to the deficit over the next parliament would consider strategic decisions regarding tax and non-fiscal policy side-by-side with public expenditure decisions. In the speech Leslie singled out skills for special attention.

This is interesting, because alongside the work of the Zero Based Budget review some Labour thinkers have promoted a shift of focus from the demand-side to the supply-side: policies aimed at strengthening the productive capacity of the economy.

In terms of real world outcomes, the two agendas clearly correspond. For example, inequality is typically tackled through taxation, social security and public service delivery. But reducing economic inequality has much to do with low pay, low skills and productivity issues too.

It will be interesting to observe whether greater interaction between the so-called supply-side revolution and thinking about the fiscal challenge will emerge over the coming year. Policies which go with the grain of this interaction would make the spending process more rational. But given the countervailing forces at work, making progress on apparently intractable issues (such as poverty and inequality) may make it increasingly necessary too.