‘Neither party is confronting the underlying problems’
Sunak and Starmer offer only short-term fixes, the former Bank of England chief economist Sir Charlie Bean tells Eir Nolsøe
Both Rishi Sunak and Sir Keir Starmer are proposing “sticking plaster solutions” to the problems plaguing the crisis-hit public sector and NHS, the former chief economist of the Bank of England has warned. Sir Charlie Bean said both leaders were just “kicking the can down the road” and ignoring fundamental problems posed by an ageing population.
Sir Charlie, who spent 14 years at Threadneedle Street and left in 2014, said Britain faces a fundamental choice of either higher taxes or lower quality public services as the financial burden of caring for the elderly grows.
“As a nation, I’m afraid we seem to want high-quality public services but we’re not willing to pay for them,” he told The Sunday Telegraph. “I don’t think either party is really confronting the underlying issue. Both are focused on the short term. It’s all but inevitable with the election two years away.”
Sir Charlie, who also served at the Government’s official spending watchdog, the Office for Budget Responsibility (OBR), from 2017 to 2021, said efficiency savings alone could not save the NHS and raised the idea of moving to a German-style insurance system. The influential economist also raised the idea of cutting state pension entitlements for people like himself who have generous private sector retirement plans.
His assessment comes amid mounting crises in the public sector. Ambulance response times and A&E waiting times are at record levels amid huge backlogs in the NHS. Railway workers, teachers and nurses are all planning strikes in the coming months.
Both the Government and Labour claim they can get NHS waiting lists down and restore the health service without ramping up taxes or borrowing further.
Labour leader Sir Keir Starmer pledged in a speech earlier in January that he has a “fully costed plan for the biggest NHS training programme in its history”. He also promised to broker an agreement that will “transform” pay and conditions for carers, but said this was not “code for Labour getting its big government cheque-book out”.
“We won’t be able to spend our way out of their mess – it’s not as simple as that,” Sir Keir said.
Meanwhile, Rishi Sunak in his new year speech said he would bring down waiting lists and pledged to boost NHS spending in November. However, he has resisted ramping up funding to the levels that many in the public sector say is necessary. He also pledged to reduce debt and is widely expected to try to woo the electorate with tax cuts in next year’s Spring Budget.
Sir Charlie said it was “disingenuous” to suggest problems could be solved through efficiency alone. “I have no doubt that efficiency can be improved. But we’ve had a decade plus of trying to improve it by austerity, and most of the low-hanging fruit has already been picked.”
Fixing the mounting problems in the overrun hospitals and GP surgeries will take root and branch reform, he said, and require a choice between either cutting services or raising taxes.
“Ideally, one wants a cross-party consensus on the best way forward. It’s not that anybody’s suggesting this at the moment. When people are saying the health service is broken, you need a vision of how to remake it.”
Sir Charlie said one idea would be a German-style system. “I think the UK electorate would not be willing to adopt the American mode,” Sir Charlie said. “That pushes you to some mix of higher taxes, and possibly social insurance à la the German model.”
Theirs is a dual public-private system funded through insurance and state spending. Workers pay 7-8pc of their pre-tax income for insurance, while the employer contributes the same amount. All citizens have equal access to cover regardless of their income and premium level.
However, it is “pretty clear” spending needs to increase regardless, Sir Charlie said. “Among our peer group of countries, we’re towards the bottom of the pack in terms of the share of GDP spent on health,” he said.
“If you read it one way, it says we’re terribly efficient. But I think the reality is that we actually get rather low quality services in return, certainly compared to Europe.”
Staff shortages are a clear sign of the need for more funding, he argued. A record number of nurses left the NHS in England last year, while those remaining went on strike for the first time ever this winter to protest falling real terms pay. “If you underpay staff, you just won’t be able to get the staff you want or retain them,” he said.
Striking nurses are part of a wave of disgruntled public sector workers walking out across the country. More working days have been lost to strikes over the past six months than during any similar period for more than 30 years, according to data from the ONS.
These disputes are “the legacy of a decade of austerity,” according to Sir Charlie. Sunak’s response has so far been to propose anti-strike laws, to make industrial action illegal in some sectors if minimum service levels are not met. “I’m pretty dubious about whether that will make a lot of difference,” Sir Charlie said. A “more reasonable” option would be to give public sector workers pay rises in line with the private sector, he says.
“There’s a sense that both the retired, who have been completely protected, and the private sector, who have been partially protected, have been getting a better deal than public sector workers.”
However, Sir Charlie said politicians must still confront the fundamental question facing the public sector: to cut back services or ramp up taxes? “What things do we want the state to do? If you’ve decided there are some things you want and level of quality, you’ve got to be willing to pay for it.”
Sir Charlie served under three governors at the Bank of England, holding the position of chief economist from 2000 until 2008 and then deputy governor for monetary policy until 2014. He was one of the most influential policy makers in the aftermath of the financial crisis.
Sir Charlie now works at the London School of Economics where he shares an office with his former boss, ex-Bank of England governor Mervyn King.
Pressure on public services and spending are the result of slow but significant structural shifts in the economy, Sir Charlie argues.
An ageing population and technological advances have led to huge increases in the cost of the NHS as people live longer, requiring more treatment, and expensive new drugs and treatments are coming to market.
“People invent new treatments for cancer or dealing with heart problems, things like that,” Sir Charlie said. “Often those treatments are expensive. But particularly if they’re life-saving, people want them, even if it’s only extending life for a year or two.”
Spending on healthcare is forecast to hit 8.4pc of GDP next year, up from about 3.5pc in the 1960s. Pensions have become more expensive too, with state spending on retirement benefits rising from 3.4pc of GDP in the ’60s to almost 6pc. The same pattern is true for other welfare spending, which is approaching doubling.
“I have a very generous occupational pension from the Bank of England,” Sir Charlie said. “Maybe I don’t need such a big state pension.”
He admitted this would be a “politically toxic debate”, as people feel very strongly they should get the state pension after paying taxes and national insurance all their working life.
Pressure to cut spending or raise taxes is building as other government budgets increase.
The end of the Cold War led to a sharp drop in defence spending but it is now climbing again as geopolitical tensions increase. “If you look at the elements that have made room for the [historic] extra spending [on pensions and healthcare], they’re all turning around,” Sir Charlie said. “So there is pressure to increase defence because of what’s happening in Ukraine and also concerns about China becoming more aggressive and possibly invading Taiwan. Interest rates on public debt in the past year have shifted markedly upwards worldwide and that looks like it will be sustained.
“So now, you’ve not only got debt stocks rising as a share of GDP but the interest rate has also gone up.”
Public investment, which had already been falling for decades, was further squeezed by austerity before Boris Johnson started increasing it again.
Neither Labour nor the Tories looks likely to cut spending, given the levelling-up agenda and Labour’s promise to revitalise the economy.
“There’s nothing that really looks like it easily gives way to accommodate these upward pressures in spending on health and benefits. There might be bits you can do on other current spending but not without degrading public services,” Sir Charlie said.
“That’s really the conundrum that both parties and the electorate need to face going forward. And the political debate is really just not engaged with this issue at all. It’s all about playing around at the margins and focusing on ‘We want to get tax cuts’ before the next election.”
‘We’ve had a decade plus of trying to improve efficiency through austerity, and most of the low-hanging fruit has already been picked’