With the Autumn Statement approaching, Leigh Thompson, Policy Advisor here at the Alliance, has cast his eye over the public finances and how it looks for sport organisations. Part one sets the scene on how the financial land lies.
This week I finally got round to reading two recent – and rather weighty – reports on the state of the public finances. Bedtime reading material you might think. However, far from sending me into a deep slumber, they made my eyes bulge.
In short, the message for sport and sports organisations is this: adapt or die. I will return to this idea later but first a little skip through some of the report ‘highlights’…
Deficit: Spending cuts
Deloitte’s ‘State of the State 2014-15’ report sets out the current position in relation to UK public finances and projects forward to around 2020 i.e. the end of the next Parliament. The period under analysis is important since 2015 will be marked by two key events: a General Election and a fresh Spending Review. The outcome of both will set the direction of travel for public spending over the course of the Parliament.
The Deloitte report makes two things abundantly clear.
First, the Government’s plan to eliminate the deficit – in other words to ensure Government spends no more than it raises in taxes each year to fund day-to-day activities – means turning a deficit of nearly £100bn today into a small surplus by 2018-19 (see fig 1 below). Given that tax receipts remain weak, reaching this objective means further, deeper public spending cuts are sure to come.
Fig. 1 Reducing the UK deficit
Source: Economic and Fiscal Outlook, OBR (taken from Deloitte ‘State of the State 2014’)
Second, even if the deficit is eliminated (a big ask), it may not make much of a difference to total national debt i.e. the stock of debt built up over time by Government borrowing incurred to fund deficits, investment and the like.
The Deloitte report indicates public sector net debt has now reached £1.4 trillion, around 80% of GDP (see fig 2). This has grown from around 30% of GDP in the early 2000s. The annual interest payment on this debt now stands at £52.1 billion – £1 billion per week – which is broadly equivalent to the entire education budget. This is clearly unsustainable in the long run.
Fig 2. Public sector net debt as % of GDP
Source: ONS, HMT (taken from IEA ‘Defusing the Debt Timebomb’)
Debt: Long term funding pressure
If this doesn’t sound scary enough, the IEA’s worryingly-titled ‘Defusing the Debt Timebomb’ report spells out what this level of debt means for future public spending and policy design over the long term i.e. over the next 50 years.
In essence the IEA’s conclusions are that to reduce net debt to 20% of GDP (i.e. below where it stood in the early 2000s) by 2064 could require immediate and sustained spending reductions of up to 9.6% of GDP.
To put that in plain English, the spending reduction required to reduce net debt to 20% in 50 years’ time is equivalent to cutting current spending on health, welfare and pensions by half. That is a staggering amount.
As the IEA report makes clear, the reason why these cuts are so drastic is largely to do with an ageing population which will, over time, require increasing resources for health and social care as well as pensions. Without radical policy reform this will place an increasingly heavy burden on future taxpayers (i.e. people of working age) to fund these future liabilities.
Election promises
Against this background it is interesting (or worrying depending on your point of view) to note that both the major political parties have made commitments to cut taxes or increase spending on essential services as part of their bid to win next year’s General Election.
For the Conservatives, the Prime Minister made a recent party conference pledge to deliver around £7.2 billion in tax cuts if they win the General Election. Assuming these tax cuts must be funded from somewhere this suggests either a slower pace of deficit reduction or, more likely, that additional spending cuts – over and above those required to clear the deficit – will be necessary.
Labour has put a £2.5 billion funding boost to the NHS at the heart of its campaign. This will (in theory at least) be funded by new taxes – a so-called ‘mansion tax’ on homes over £2m and a levy on tobacco companies. However Labour has also committed to balancing the books during the next Parliament which implies delivering similar levels of public spending cuts to those envisaged by the current Government.
At this point you may want a lie down. Or you may simply be questioning what failure to reduce the deficit and public debt has to do with sport. In my view repairing the public finances will pose a profound challenge to the future funding of sport and the design of sports policy.
In Part 2 of this blog I will explain why.
Read more from Leigh.
