Challenges facing the new Government?

So we have had the election. We’ve got a government being formed and a cabinet being formed as we speak. I think it is just an opportune moment just to get your views on what does the future hold? What are the implications for our clients?

John, let me just start with you. Clearly, against the context of the public deficit, huge issues that clearly were played out during the campaign and the election and all that. What is the issue? Where are we? What are the prospects for the UK economy?

The good news is that we are getting a gradual recovery in the UK. We are probably going to get growth of 1% or so this year. The bad news is that there are still a lot of problems out there in the world. In the Euro area in financial crisis, which nearly hit us last week, but has just been rescued by a big bail-out at the weekend.

So we’ve still got this problem, although we had this big build up of private debt during the last decade that has now been transferred onto public sector balance sheets. That stopped the crisis for the moment, but it has built up a huge problem for the future to repay that public debt, and of course the UK had one of the biggest budget deficits in the OECD and so we have a huge challenge now for the new government to try to address that deficit and that is going to require a much more detailed and credible plan than that which was announced by any of the parties during the election, involving both big tax rises and big spending cuts.

Clearly, working on that and the prospect of an emergency budget coming up within 50 days or so. ... Jon, let me bring you in at this point. What do you think, then, against that background. What do you see then as some of the immediate issues that the government is going to have to face?

Well, we are going to have to see where the spending restrictions will fall when we see the emergency budget. I suspect that for the first year and from the point of view of people doing business with the government, there wont be a huge impact, simply because it is quite hard to make big savings in a year. So I think the immediate impact will be price pressure, renegotiating existing contracts perhaps, some cutting in very discretionary areas. The bigger impact will be in the medium term when we get on to the famous efficiency agendas - so suddenly during the election campaign efficiency became a political topic, and will carry on being a political topic, and I think that will have a very volatile impact for business and the business services sector. Those who just stick to supply to government in to normal “business as usual” will have a hard time, those who come up with different ways of doing things which release cashable savings - real cash - then they will succeed.

Do you think there will be winners and losers in all of this?

Yes, I think in any tough market shares are very volatile - so I think this is a very tough market, and we will see some people, some big names I think, really struggling and some other names coming through. And as I say, it’s people - it’s not doing more for the same, or more for more money, it’s the same or a bit less for a lot less cash out.

Doing things in a different way?

Yes.

Julie, in a longer term.. I mean we have clearly talked about the short term pressures, medium term... in longer term things..there is a huge agenda here for the Government to deal with.

There is.. but I think one of the most profound things is the challenge of dealing with our aging population. Over the next couple of decades we’ve got the double whammy of the retirement of that large group of baby boomers who were born between 1945 and 65, plus the on-going - we all live longer - which means that age related spending for government is going to go up and there are labour market issues for employers - who are our clients for example.

So as fast as we reduce, we’ve got a problem going the other direction.

Absolutely, even if the politicians succeed in bringing down the debt due to the banking crisis, when you add in the projected increase in debt because of age-related spending, then actually the debt carries on going up. It doesn’t come down, and that is clearly not sustainable.

Ok, so what are the implications for our clients with that then?

Well, one of the things we’ve recommended to Government is that they increase the state pension age. They are already planning to increase it to 68 by 2046 and we are recommending that it is increased to 70 by 2046, and that means we all have to work longer. And for employers - that means Government needs to think about its skill strategy to retrain people during their working life, and to end the default retirement age so that people can work longer, but for our employers I think it is a real challenge because coming out of recession, we are most concerned about getting young people into work. There are all sorts of misconceptions about older workers aren’t productive, but if we don’t tackle it, we have a huge hole in the labour market because of the small number of younger people coming through.

So big issue there. John, I mean let’s just open it up.. so we’ve got massive issues coming in the red boxes for the cabinet when it’s formed. What would be your one or two really key things there?

As I mentioned earlier just briefly, I think tax rises are on the way. We can do so much on the spending side as Jon said, but particularly with this longer term demographic change as well, you just can’t fill the fiscal gap entirely from spending cuts, you just have to have big tax rises. I think an increase in VAT, for example, is very likely...

VAT increase...

Probably increases in green taxes, I think the Liberal Democrats have already talked about the aviation taxes - we may see those going up quite a lot. Probably a range of taxes on the banks and a range of other people as well.

So again, some big pressures there and affecting different industries, different sectors in different ways.

Yes, I mean VAT obviously, consumer sectors, retail, the banks, likely to be hit, air transport - haven’t got enough problems, may be hit by these aviation taxes, and really affecting both individuals and business and there is also potential reform of Corporation tax, by the conservative party which is going to reduce the rate, and take away investment allowances, that will hit manufacturers if they go through with that. Almost all businesses are likely to be affected by the measures we are likely to see introduced.

So they will be looking at the budget at the emergency measures really pretty closely, and in the meantime, clearly some huge uncertainty about what all that means for investment decisions and so on.

Certainly, .. we had a kind of phoney budget in March, and we are going to get the real budget towards the end of June.

Jon..

I pick up a couple of things - first from Julia’s point. I think a real act of leadership required from the Government about getting people to get their head round the idea that they will work longer, that their children will work longer, re-organising their personal finances to accommodate that, re-shaping some of the financial services industry so that it provides products which meet more longer, gradual retirement. So that is a real longer term leadership challenge.

And that is affecting industries as well as individuals..

Yes, it’s employers, .. it’s financial services sectors and it’s us as individuals. Personally Patrick, I am expecting to work until I’m 92.... I think a more immediate thing is picking up John’s point about taxes potentially on the banks.. is quite a challenge here because both the Conservatives and the Liberal Democrats come into power with some big radical ideas on structural reform. I think they are going to be met not only with of course a lot of lobbying from the Financial Services sector, but some fairly cautious official advice, saying “Be careful about the macro-economic consequences of perhaps major increases in reserving requirements.. Be careful about potential first-mover disadvantage of doing things ahead of other international financial centres. So some big things to grapple with there.

Julie, just one or two keys points there for you...... What would you be looking out for in terms of key challenges......and may be opportunities for our clients?

Well, we have talked about the negative side of the aging population, but actually for our clients I think there are some real upsides, because those baby boomers have quite different expectations and aspirations about what they want as products and services as they move into retirement and leisure years. So I think there are opportunities in housing........ How you design housing to suit people with mobility difficulties..... Groups of houses or apartments which suit older people, with possibilities of residential staff, Tele-healthcare opportunities, Social networking,....Older people want to volunteer more. We can make it easier on a commercial basis using social networking, and actually big changes in the social care market - so people wanting to be independent for longer and have care in their own home, and have higher expectations for the quality of care and their independence in residential care.

So John, final thought from you..

Final thought is that another longer term challenge... is the low carbon economy. I mean there is a lot of commitment to environmental issues by both the Conservatives and the Liberal Democrats and I think that will have fundamental impacts for business and challenges for energy intensive companies, but I think huge opportunities to produce low carbon products and services to actually transform the economy by 2020, and hit the very ambitious targets that they have inherited from the previous Government.

So I think you are all saying.......you know.........big challenges .......... Cameron in his speech at Number 10 was just talking about the big challenges that this country faces. Big challenges - you see that, ......Huge agenda for the new Government coming in, but equally, opportunities for people in different sectors, as we see all of this play out.

Thank you all three of you very much!

With a new Government now in place Jon Sibson,Government and Public Sector leader, John Hawksworth, Head of PwC Macroeconomics and Dame Julie Mellor share their views on some of the short, medium and long term challenges facing the new Government and implications for our clients.

As part of the ongoing "Stay Ahead" programme our specialists comment on the public deficit, and the prospect of tax rises and medium term cuts in public expenditure.   They go on to discuss the possible impact that our ageing population will have on the long term public deficit.

The Panel argues that most businesses and individuals will be affected, with different sectors facing their own specific challenges.   Winners and losers will emerge, with opportunities for businesses who are prepared to do something different.

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