The great escape

This report is the first in a series on the size and shape of the state, and how the public finances can be better managed in an era of low growth and high uncertainty. It diagnoses how Britain fell into its seemingly endless fiscal funk and sets out a playbook for escaping it.

With a new Prime Minister and Chancellor about to take up residence in Downing Street, it is clear they will inherit a country stuck in a financial rut. Public debt has nearly tripled since the financial crisis, taxes are heading to an 80-year high, and Budget preparations are dominated by doom-laden speculation about further belt-tightening and tax rises against a backdrop of volatile financial markets.

Weak growth is the biggest culprit, but its importance is frequently overestimated. It’s true that weak growth has been disastrous for tax receipts, which are around £450 billion a year below the path they would be on if growth had continued at its pre-crisis rate. But because public sector pay and welfare spending are anchored to private sector earnings, this has been partly offset by £210 billion of admittedly painful ‘savings’ as both slowed with the wider economy. On top of this, Britain has grown older and sicker, adding around £90 billion of spending pressures. Accommodating these rising needs has led to deep cuts to almost every other public service.

Despite the likely intensification of pressures from ageing and ill-health, it is not farfetched to think that we can escape this funk. What is clear, however, is that simply hoping that growth rides to the rescue, or reaching for wheezes that loosen the fiscal rules, will not cut it. Instead, the escape plan is surprisingly straightforward: balancing the current budget on average, something the Government has already promised, would leave debt lower in 30 years’ time than today. Delivering that means running surpluses in normal times, fixing unsustainable policies, raising public sector productivity, and taking a more strategic approach to the size and shape of the state.