BRITAIN faces a major problem. We need to shrink our bloated, inefficient state while simultaneously improving our healthcare, pensions, infrastructure and the rest. There is, fortunately, a solution but it will require a degree of political courage currently absent from the UK political scene.
The chancellor’s solution – he hopes to cut public spending by a total of 3.4 per cent in real terms between 2010-11 and 2017-18, and reduce public spending from 44.7 per cent of GDP last year to 38.2 per cent on the Treasury figures by 2018-19 – is insufficiently comprehensive. The first problem is that it will be very difficult to pull off: large chunks of the public sector are ring-fenced, these numbers are top down rather than bottom up, and they rely extensively on a very strong, sustained economic recovery. The second problem is that while there are massive inefficiencies in the public sector and better services could doubtless be produced with less money, the system’s current incentives means that cuts will not necessarily lead to improved productivity. We saw that with the high-profile shutting of libraries: some councils could have cut something else but instead ended up axing frontline services. The government has been more successful than some thought at waging war on waste – the progress made by the Cabinet Office is remarkable – but we need much, much more.
The third problem is that these cuts are not by themselves enough: cutting spending as hoped for by Osborne will still not really allow any big tax cuts. It will merely balance the budget, while saddling the UK with incentive-destroying tax rates. Finally, the fourth problem is that as populations become wealthier they rightly want to spend much more on healthcare – and that will put huge upwards pressure on budgets over the next decade, regardless of today’s medium-term forecasts. Pensions are partly being tackled by raising the retirement age – but ultimately the state pension system remains deeply inadequate, despite all the benefits for pensioners.
The answer is to look overseas. The figures I cited above for public spending are the Treasury’s: the OECD measure, which compares nations internationally, suggests that the UK spent 47.2 per cent of GDP last year. By contrast, Australia spent 35.4 per cent, Switzerland spent 33.9 per cent and ultra-prosperous, super-online South Korea spent 30.4 per cent of GDP. These countries have excellent pensions, healthcare and infrastructure; and yet their governments spend much less than ours. We too should aim for Swiss-style levels of public spending (and prosperity) over the next decade.
How can it be done? On top of Osborne’s squeeze, we need to rethink the welfare state. Prosperous folk should take greater responsibility for themselves; the poor, the unfortunate and the unlucky should be assisted generously, but as part of a system based on hand-ups, not hand-outs. The private sector, charities and consumer choice need to be harnessed. We need to learn from other countries: there are lots of examples of healthcare, pensions and infrastructure being provided more efficiently and cheaply.
The pension systems we see in New Zealand, Australia, Switzerland, Singapore and in South America, among other places, work much better: they are based on mass savings in personalised accounts. A recent report from Reform, the think-tank, lists all the ways in which European healthcare systems now allow more choice, diversity of provision and co-payments than we have in Britain. The Dutch model is especially interesting, as is, once again the Swiss and the Singaporean. Scandinavian healthcare is much less monolithic than ours.
The welfare state as currently constituted in the UK has reached a dead end. We need to learn from other more imaginative countries – and start again from scratch.