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Fixing the Public Finances 2011

Bill Hall

Partner – Public Sector

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©2011 Deloitte MCS Limited. All rights reserved.

The Economy : How this cycle could pan out Boom 20%

Doom 10%

New normal

Peak

Trough

Peak

Trough

Recession Ex

pans

ion

Debt machine restarts

Double dip or worse

Economics & Markets, Deloitte Research, London


The Economy : Growth Headwinds & Tailwinds

Headwinds Tailwinds

Fiscal tighteningDebtWeak consumersUncertainty

Low interest rates/QE2Financial repairStrong corporatesMomentum



The Economy : Key indicators

The Deloitte Academy4

pe

rce

nt

Source: HM Treasury


-14.0%-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%

Ireland

UK

Spain

USA

Japan

Greece

France

Portugal

Italy

Germany

Australia

Canada

Sweden


The Economy : Comparison to Others

Fiscal deficit for 2010 (% GDP)

UK


The Economist house price indicators: % under(-)/over(+) valued against long-run

average of price-to-rents ratio

-34.6

-14.5

-7

3.1

13.1

15.7

17.1

18.5

20.3

22.2

23

23.7

30.7

33.8

39.4

39.4

50.4

53.6

61.1

-40 -20 0 20 40 60 80

Japan

Germany

Switzerland

United States (Case-Shiller ten-city index)

Italy

Ireland

China

Denmark

Singapore

Netherlands

Canada

New Zealand

Belgium

Britain

Sweden

France

Spain

Hong Kong

Australia

The Economy : Debt headwind


UK


The Economy : UK CFO Survey: availability and price of corporate credit

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

Cost of credit

Availability of credit



The Economy : Where is the growth in the global economy

Top 10 Bottom 10

1. China 8.6 1. Greece -3.5

2. India 8.6 2. Venezuela -2.1

3. Indonesia 6.0 3. Portugal -1

4. Chile 5.7 4. Ireland 0.2

5. Egypt 5.5 5. Spain 0.4

6. Brazil 4.5 6. Iceland 0.8

7. Colombia 4.4 7. Italy 1

8. Hong Kong 4.3 8. Japan 1.2

9. Malaysia 4.2 9. Norway 1.3

10. Taiwan 4.2 10. Austria 1.4

GDP growth in 2011, Top 10 and Bottom 10 major countries



The Economy : Conclusions


• Financial system stabilised but risks and uncertainties abound

• Interest rates ultra low, QE means easier financial conditions

• Balance sheet rebuilding

• Constraints: consumer, government

• Growth in emerging markets stronger than in the developed world

• Rebalancing economies => recovery depends on exports, manufacturing, profits, capital expenditure

= Choppy, continuing recovery – New Normal


Public Finances: Expenditure and Income

10Footer

Source: Guardian

Income = c£577bn

Public Finance: Tax and spend since 1980

Public Finances: The fiscal deficit


Public Finances :Comprehensive Spending Review(CSR)

• About 490,000 public sector jobs likely to be lost (Figures has been revised down)• Average 19% four-year cut in departmental budgets • Structural deficit to be eliminated by 2015 • £7bn in additional welfare budget cuts • Police funding cut by 4% a year • Retirement age to rise from 65 to 66 by 2020 • NHS budget protected; £2bn extra for social care • Schools budget to rise every year until 2015 • Regulated rail fares to rise 3% above inflation • Permanent bank levy

Headlines


Public Finances : CSR numbers

Source: HM Treasury

£81 billion over 4 years:

Department Budget (£bn)

Administrative and program changes (%)

Capital changes (%)

Education 58.4 -3.4 -60

Health 103.8 1.3 -17

Transport 12.8 -21 -11

Local government 28.5 -27 -74

Business 19.6 -25 -52

Home Office 10.1 -23 -49

Defence 32.9 -7.5 -7.5

Welfare 151.6 -11 -5.5


Public Finances : The top line impact

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• Total spend will still increase from £669bn to £739bn• National debt will still hit £1 trillion next year• Public spending will still be above 40% of GDP- the same level as in 2006-07

£ Billio

n

% o

f GD

P

Public spending as a percentage of GDP

©2011 Deloitte MCS Limited. All rights reserved.16

Government spending in 3 groups: AME cash payouts, pay, and spend on third parties.

£243 billion worth of goods and services purchased annually.

Deloitte thinks this may reach £300bn by 2013-14.

Over £1 in every £3 spent by government is in the private sector.

We think this could be up to 44 per cent by 2013-14

Represents 6 per cent of GDP and employs 1.2m people.

Public Finances : Government as a customer


Public Finances : Does Outsourcing create value?

When:

• there is scale from multiple contracts

• new expertise is required

• capital investment is needed

• there are measureable and repeatable service lots

• minimal client-side oversight/monitoring is required

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Public Finances: Is social enterprise the answer?

It can lower the cost and increase the quality if:

• TUPE issues can be resolved

• Volunteers and the leadership skills are available

• Governance costs are lower: Can Politicians accept this?

• Client costs are minimised: Can existing organisations let go?

• Capital can be found to support the new venture: How?

• Cost effective infrastructure can support the new venture: Are there viable shared services?

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Challenges : For procurement

• Reduce existing contract costs at a time rest of economy is recovering

• Procure extra services. Deloitte estimate c£50B by 2013/14

• How do you commission/contract with the third sector/social enterprise?

• Procurement process challenges

–Compliant

– Innovation • Using Risk and Reward Appropriately:

–Models need to make commercial sense for all parties• No “Fire and forget”,. Ongoing contract management is required

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