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Public finances: demolition or restoration?

"The spending review is not about spending, it is about rebalancing the resources in our economy which have become scarcer due to the global fiscal crises and as a result of poor fiscal management here in the UK." 

Colm Reilly
Guardian Public
30 September 2010

Cutting services to reduce current debt levels is not the way forward, argues Colm Reilly, individuals are balancing their own household budgets without drastic action and the government should take note

'Do less, with less' is the simple and conventional answer to reducing government debt.

That is the equivalent of saying "the roof is leaking, so I'll move out of the top floor so the rain doesn't bother me".

It is a short-term fix but meanwhile the damp spreads from the top floor to the whole building, creating a much bigger and more expensive problem.

The "we need to cut services to reduce current debts" response is the same kind of approach, based on the view that the situation is so urgent that we must do something now, and that we can worry about the long term economic repairs some other time.

That assessment is correct, but only to a point.

The spending review is not about spending (the name is misleading), it is about rebalancing the resources in our economy which have become scarcer due to the global fiscal crises and as a result of poor fiscal management here in the UK.

This means the review should be used as the opportunity to build a scaffolding around the economic building both to manage the current position (as deficit reduction is essential) but also to start on the longer term action to get growth back into the UK economy.

The repairs are the critical defining factor for its success. If the review is used only to cut spending, with no real plan for future growth and the kind of public services needed to support the economy, it will lead to a period of slow growth and ongoing pain.

Government services

However, if the review undertakes a clear sighted examination of the future shape of government services, how we can move to a lower cost operating model and of the levers that can be used to stimulate growth then it will be a major step forward in fixing the fundamentals of the economy.

There will be hard decisions in the short term but there are ways of improving the decision making process by greater citizen involvement.

Citizens have already shown that they know how to do this by making hard decisions to balance their own household expenses during the recession ("I'll paint the living room myself, instead of hiring a painter - because I'd rather have the cash than the free time").

As a result, they are managing the effects of the recession on their personal finances better than we are managing the public finances. So there is a need to engage in a dialogue with broader society and ask the citizen which services they are prepared to compromise on and which they world rather pay extra in taxation to preserve.

Consultation, focus groups and online forums all give the citizen a voice in the reconfiguration of the services that matter most to them.

The consultation mechanism does not imply that citizens have a veto but gives them a voice, and this voice would be a tangible sign of a Big Society.

In parallel to this work, there is a whole range of longer term actions needed to build resilience and sustainable recovery into the economy for the future.

An important starting point is to address the fundamental flaws in the banking sector. There needs to be real reform to create a balanced approach to risk, not the pendulum swing from high risk to no risk that we have seen in the past three years.

The current attempts at reform through [capital and liquidity reform package] Basel 3 and other changes are missing the point.

The proposals, devised by bankers for bankers, incorporate further process related requirements. However, processes never fix behavioural flaws of any industry and careless risk taking, when you do not have to bear the costs, seems a relatively easy option.

The causes of the reckless behaviour leading up to the crisis and the levers that drive the approach to risk in banking have not been tackled. Unless they are, we risk seeing history repeat itself.

Then there needs to be real change in the support available for enterprise. This should include providing incentives for the formation and growth of truly global companies who are set up to export from the outset.

Intelligent business tax

For example, an intelligent business tax where the level of contribution to economic growth your industry makes could be used to reduce the tax rate would encourage a more ambitious approach to how businesses go to the global market.

Exports need to drive our economic activity in the next decade. The Made in Britainlogo needs to be seen in markets across the world. This kind of focus will sharpen our economic performance and strengthen national competitiveness.

Government, as the key facilitator of change, has to take a fundamental look at the way it operates and drive real change.

The way government manages its own workforce is rigid and complex. Flexible resourcing would create pools of people within government departments who could turn their hand to a much wider range of tasks.

As a result, they could respond to changes in demand over time more quickly and without the need for lengthy and expensive recruitment of a different skill set with every change in policy or service requirements.

So while the short-term pressures are considerable, it is essential that the spending review is used to repair and rebuild the economy and create sustainable growth for the future. We are going through a rough patch at the moment but it is also a time of renewal and refocus and the opportunity to build a more robust economy which benefits us all.

Colm Reilly is head of government practice at PA Consulting Group.

You can read the article in full here

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To read more of Colm's views, please click here and here.

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