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When the economy catches a cold, the public sector catches pneumonia

By michaelward, Mar 1 2013 04:40PM

Public services in the North of England are being stretched to breaking point and another round of efficiency savings won’t be enough to protect services.

The Coalition’s Office for Budget Responsibility has established that the 2008/9 recession was deeper and more damaging than had at first been thought. And since the start of the austerity programme in 2010 the economy has flatlined.

This lack of growth is very serious for the public sector. With the economy grinding along at a far lower level of activity than had been anticipated, the tax revenues are not there to fund existing levels of public services – leave alone to cope with increased demand or demographic change.

The Coalition originally expected five years of squeeze, followed by a period of recovery. But this time, unlike past recessions, the economy has not bounced back. Austerity is now forecast to continue at least until 2018. As my new report, published by the Smith Institute with the support of PwC (‘Public Services North: Time for a New Deal?’) shows, happy days are certainly not here again.

Now some services, notably the NHS, have been ‘protected’. The trouble is, logically, if you propose overall cuts, and then protect some services, other policy areas are hit even harder. Thus the cumulative cuts to the CLG Department’s Communities budget – covering, among other things, much of the social housing budget – are forecast to reach 70% by 2018.

In addition, the national tax base is declining. As North Sea oil production passes its peak, so tax revenues from oil production begin to fall sharply. As environmental taxes begin to change behaviour (for example, as fuel duty encourages manufacturers to develop more fuel-efficient engines), so the yield from these taxes goes down.

Corporation tax rates are increasingly set with reference to tax rates in other jurisdictions, as countries jostle to attract footloose investment.

On top of all this, the local government finance system does not serve the needs of the North well. The tax base – for Council Tax and Business Rates alike – is now heavily concentrated in London and the South East. Since 2010, the grant system has become less redistributive. Grants that used to be targeted on the areas with the highest needs have been ‘rolled in’ to the general grant – and in turn some of that general grant has been taken out of the formula to fund the Government’s New Homes Bonus – which favours more affluent areas and the South.

All this amounts to a car crash for public services in the North. As Sheffield City Council’s Leader, Julie Dore, says:

“To have another three years of cuts will cause the whole social infrastructure to collapse and services will go.”

So what needs to happen?

• First, the key redistributive elements of central government support to local government need to be restored, giving poorer communities a fairer share;

• Second, Councils and trade unions need to work together to drive up service productivity. There are no quick fixes – but without this, both jobs and services will go; and

• Third, service providers and civil society across the North need to work out what the deal is for the future – an alliance for change under the umbrella of ‘Public Services North’.

It is time to face the big questions:

• As a society, what will we provide through the state, what through the market?

• What services will be provided by local government, what by central?

• How will we pay for public services, through taxation or user charges?

These choices will not simply go away after the next general election. Any incoming government will face serious constraints on what it can promise. Neither is there any easy way out for service providers.

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