Vince Cable's words of wisdom on the economy

Vince Cable spoke this morning to the 2020 Public Services Trust, a new think tank based here at the RSA, and with whom we are working in partnership. It was an interesting and high powered conversation ranging from the current economic crisis to longer term strategic issues facing the public sector.

Vince is one of our most highly respected Parliamentarians on the basis not just of his cutting wit and self effacing style, but also his perspicacity in predicting key features of the credit crunch. He was one of the very few politicians around the world willing to argue that we would one day have to pay the price for spiralling household debt.

The Lib Dems are now lining up with the Conservatives in arguing that new public expenditure should not be financed by additional public borrowing, beyond that which will anyway be made necessary by the recession. But Cable recognises that in the short to medium term the public sector needs to be protected as a safe haven of employment and a generator of spending on private sector service and goods.

A couple of weeks ago I had an exchange with Tim Montgomerie of ConservativeHome. We agreed that political leaders needed to be more up front with us about the depth and impact of the economic downturn. We still haven’t heard this speech but listening to Vince I now feel there is another speech we need, directed particularly at the public sector.

In this speech public managers – everyone from local authority chief executives to primary school head teachers - need to be put on notice. While spending levels will be maintained, and may even be increased, in the next two years after that a substantial retrenchment is inevitable. There is much talk in Treasury circles of re-profiling spending plans. In layman’s terms that means spend more now and less in the future. So, for example, a three year programme involving £20 million extra every year for three years (a cumulative £120 million) might be re-profiled as £30 million extra in year one, another £30 million extra in year two but a reduction by £30 million in year three (also £120 million).

As a manager myself I know that I would much rather be told now that I should be planning and investing for difficult times ahead than be suddenly confronted by cuts. In this sense, as I said to Vince at the end of the seminar, the public sector needs to hear the message that too few households heeded in the boom. Borrowing is fine as a strategy, it may be a good investment or an important counter cyclical tool, but growing borrowing cannot become a lifetime habit.

If public mangers start preparing now for the inevitable squeeze from 2010 onwards, indeed if they invest some of the money they now have in measures that can improve productivity and reduce the underlying cost base, then the squeeze when it comes can be tough but not life threatening (more bear than boa constrictor).

For, as Vince said, the danger of assuming we can cut back in future years is that when push comes to shove the cuts are too painful to deliver. In that way a cyclical debt problem can become endemic.