PUBLIC SECTOR REFORMS

Examine the contention that public sector reform is needed in the UK

Examine the contention that public sector reform is needed in the UK

Introduction

One of the more troubling aspects of economic performance in the UK since the recession has been the persistence of high levels of public sector borrowing. Borrowing reached a peak of 7.1 per cent of GDP in 1993-94 and has since fallen to 4.5 per cent in 1995-96, with a further fall to 3 1/2 per cent in prospect for this year. (Bellamy, 1998) Continued borrowing at high levels has raised public sector indebtedness. (Pollitt, 2004) On the Maastricht treaty definition, general government debt has risen from 41.9 per cent of GDP in 1992 to an estimated 54.2 per cent of GDP in 1995 so that much of the leeway below the 60 per cent reference level has been used up. The overall net worth of the public sector has declined from 28 per cent of GDP to 14 per cent over the same period. (Greener, 2009)

The durability of borrowing at a high level raises questions about the sustainability of current policy towards public expenditure and taxation. (McLaughlin, 2001) One of the issues which this paper seeks to address is whether the existing combination of spending and receipts can be sustained, taking account of the composition of spending between current consumption and investment and receipts between taxation and asset sales. We suggest that there is a need for further tax increases or spending cuts of the order of 2 per cent of GDP to stabilize the public finances. (Hughes, 2003)

The present government plans to reduce spending as a share of national income over the coming years and if implemented this would put the public finances onto a sound footing, assuming that the economy develops as we forecast. However, there is a worry that these plans are over ambitious in some areas and harsh in others and hence may turn out to be difficult to implement. Therefore, it is more probable that a future government will be forced to raise taxes at some time if stability is to be achieved.

Discussion

Fiscal policy can be thought of as a set of tax rules and spending objectives or plans which is sustainable when the implementation of those plans does not lead to an ever-worsening balance sheet position through the accumulation of debt or decumulation of capital. It should be noted at the outset that fiscal positions are generally not sustainable. (Eliassen, 2008) This is because the interest rate is usually greater than the growth rate of the economy implying that for a large enough initial level of net debt, interest payments will be compounded at a faster rate than income can be generated to pay for them. In effect, fiscal policy is on a knife edge: if it is too loose, then the balance sheet worsens without limit and if it is too tight the balance sheet improves without limit. As such policy needs to be adjusted from time to ...