Spending cuts could create Irish style fiscal crisis in UK by 2019, institute warns

News - Banking

Written by Ray Clancy

Tuesday, 30 November 2010 11:29

The UK could face another fiscal crisis by 2019 and find itself in a similar position as the Irish have just experienced, it is claimed.

Despite the coalition government’s spending reforms, public spending is set to face huge rises due to future commitments on healthcare, welfare, pensions and education and these, combined with the pressures of an ageing population, could result in a fiscal crisis, says the influential Adam Smith Institute.

It is calling for radical reforms and warning that the government’s future commitments on healthcare, welfare, pensions and education are unsustainable. Spending in these areas has continually grown, and will continue to face mounting pressure due to an ageing population. As a result, the official debt figure is in reality only a fraction of the story, it says.

According to the calculations in the Institute’s report, ‘On Borrowed Time’ by Miles Saltiel, there are three possible scenarios for the UK’s fiscal outlook. The worst, where the Comprehensive Spending Review is followed to 2015 to 2016 and all the ‘proceeds of growth’ are used to fund higher public spending thereafter, would result in fiscal crisis by 2019.

The second scenario, where the proceeds of growth are split 50:50 between spending increases and debt reduction from 2015 to 2016 onwards, would only result in fiscal calamity being delayed until 2031.

In contrast, the third scenario, where public spending is held constant and all the proceeds of growth are devoted to debt reduction, would lead to the national debt being eliminated in 2041.

The Adam Smith Institute favours the third scenario and makes a number of recommendations within the report on how the government could achieve such spending restraint. The proposals would see the transformation of the role of the state away from the insurer of first resort towards being a safety net for the poorest. The vast majority of people would provide for themselves, whilst the welfare state's focus will only be on the most needy within our society.

The report identifies healthcare as a key area needing radical transformation. Miles Saltiel, author of the report and award winning analyst, proposes that the government should mandate a minimum healthcare package that everyone would be obliged to buy, and would fund premiums for those unable to afford them themselves.

Beyond that, the health system would be private. All service providers, such as hospitals, would be privatized, which he calculates would raise one off proceeds of £236 billion after recapitalising PFI obligations of £28.9 billion.

On welfare, the report proposes the introduction of a supportive tax and regulatory regime to foster private provision of incapacity, income and mortgage insurance. State support would be a time limited last resort and conditional on intervention to get claimants back into work. Suggestions on how to reform education and pensions are also included in the report, in an attempt to replace run away costs with self limiting systems that focus on innovation and value for money.

‘We cannot keep voting ourselves generous pensions, healthcare and other benefits and vainly hope that our children will happily pick up the bill. It’s time we got realistic on the scale of the problem, forced politicians to fess up to the future costs of new policies, and brought in rules to make sure that future generations cannot be saddled with the cost of our extravagances,’ said Eamonn Butler, director of the Adam Smith Institute.