The government’s first resolution for 2011 should be to get inflation down.
The government’s own budgets show it cannot afford all the inflation it is assuming. 10 departments of the government show increases in spending in published plans over the five years of this government, but only four show increases after adjusting for forecast inflation. Overall spending (current and capital) goes up by £44 billion a year over the four years, but this is presented as a cut owing to expected price and wage increases. Current spending will be £93 billion a year higher than in the last Labour year in 2014-15, yet this requires cuts.
For individuals and families inflation is also a bane. If you have saved or have been prudent, you see the value of your money falling by almost 5% a year at the current level of RPI inflation. 5% halves its value every twelve years. Current low levels of interest rates, and the withdrawal of inflation linked National Savings products, leaves you no easy or reliable way of protecting the value of your savings.
Government should look again at the public spending figures and admit they cannot afford the inflation built into the numbers. They seem to be assuming a little under 10% inflation over the four years 2011-15. That’s another ten per cent on public spending they need to raise from us in taxes, and a ten percent on spending which does not yield any improvements in services. It’s ten per cent despite the policy of a wage freeze for part of the period, and the policy of buying better throughout the four years.
So what could the government do to bring inflation down? It could let the Bank of England know it is not best pleased with their poor performance on inflation so far. It could show that it regards inflation as public enemy number one. The Bank could put interest rates up a bit to signal its intention to take curbing price increases seriously, and to stop any further devaluation of the pound which is the source of much of our inflation. It could work more closely with public sector managers to plan for a low or no inflation world where the public sector can do more for less because some wages and prices are not always leaping up in the way they have in recent years.
Higher public sector pay should come from improved efficiency and be a reward for excellence and achievement. That type of pay award is self financing. Lower costs of purchase should not be difficult to achieve across the public sector, given the poor record of much public procurement in recent years. Better procurement may well entail inviting in a new range of suppliers to add more competitive edge and to help more emerging UK businesses who have found selling to the public sector difficult, given the scale and the complexity of many of the contracts on offer.
The government’s aim is to rebalance the economy. It wants more saving and investment, and less consumption and borrowing. That requires a better reward for savers in the form of a real return on low risk savings. Taking control of inflation more seriously is central to achieving that shift. It will also help deliver more for less in the heavily indebted public sector.
Cash increases by department, 2014-15 compared to 2010-11
Health £11.1 billion
Education £3.1 billion
Defence £0.4 billion
International Aid £3.1 billion
Work and Pensions £0.8 billion
Scotland £0.6 billion
Wales £0.2 billion
Northern Ireland £0.2 billion
Cabinet Office £0.1 billion
Intelligence £0.1 billion
Reserve £0.5 billion