Friday, May 15, 2009

What Should Cam Cut?

Time to stop mucking about

As regular readers will know, we reckon Cam will need to target public expenditure cuts of around £50bn pa. But what?

First, let's remind ourselves of the situation he'll inherit.

According to the Budget (see here for excellent IFS analysis), Labour have already slashed future investment spending, which is set to fall by 17.3% pa in real terms from 2011 onwards. There is almost certainly a bit more that Cam could do there - such as canning the bonkers programme to rebuild all our state secondary schools (eg see this blog) - but the real action will have to be in the much more difficult area of current spending (ie wages and salaries, welfare benefits, NHS drugs, school building maintenance, etc etc).

The Budget projected further increases in current spending, averaging 0.7% pa in real terms from 2011 onwards.

Why not just freeze it?

Unfortunately, it's not that easy: relative to what's been achieved historically, 0.7% pa is already heroically restrained, as shown in the IFS's handy chart:

So just to make sure we all understand, over the last half century, current spending has only ever declined in five years:

  • 1977-78 - the IMF mid-air emergency cuts
  • 1985-86 - strong Thatcherite growth had enabled the sick man of Europe to rise from his bed and get back to work, thus cutting the welfare bill
  • 1988-89 - My Brilliant Chancellor had delivered a loadsajobs boom, thus cutting the welfare bill
  • 1996-97 and 1997-98 - the Major/Clarke golden legacy had not yet been squandered by Prudence Brown

The bottom line is that cutting current spending is not something UK governments have ever shown much aptitude for. And cutting spending in the teeth of a massive recession is something they have never ever achieved.


What can be done?

In a quest for ideas, Tyler has just read Reform's recent report Back to Black. As always, they are prepared to name names, and they make specific proposals for cuts. They also grip the urgency of the situation, focusing on next year (2010-11) rather than pretending the pain can be pushed off beyond the distant blue horizon.

Here's their summary, featuring some highly contentious items:

  • Abolish universal Child Benefit. Instead Child Benefit should be targeted on families on low incomes. Saving: £7.1 billion (after making allowance for additional expenditure of £5 billion on the poorest families).
  • Reduce the pay of doctors and NHS managers by 10 per cent. NHS pay rocketed in the middle years of this decade, far above the average rate of pay growth in the economy. NHS pay rises are already falling as the service returns to sanity, but not yet far enough. Saving: £1.3 billion.
  • End inappropriate defence projects. Several projects (the future carriers, Eurofighter Tranche 3, A400M and Nimrod MRA4) do not contribute to the UK’s modern defence requirements. Saving: £2.7 billion.
  • Remove pensioner gimmicks, such as the winter fuel payment and free TV licences for over-75s. Saving: £3.2 billion.
  • Introduce market rates for interest on student loans. Saving: £1.2 billion.

They make a number of other proposals, including axing various quangos, and abolishing large chunks of the spectacularly useless nationalised skills industry (see many previous BOM posts).

Their overall cuts stack up to £29bn in 2010-11, as follows:

This is a serious piece of work, and Reform is notably not ducking the issues.

It's also fairly clear that Cam drew on their work for his New Age of Austerity speech (see this BOM post). Except for some unaccountable reason, he forgot to mention the cuts to benefits and NHS wages.

The only problem with Reform's cuts package is that it doesn't go far enough. Cutswise, we need to find roughly the same again.


PS As we've blogged many times, to push through the necessary spending cuts, Cam is going to have to grow an even thicker skin than he's already got. He will soon be joining Thatcher on the left's Pantheon of Evil. And as if to underline that point, this morning's BBC R4 Today programme featured leftwing pundit Oliver James, who was given yet another opportunity to tell us how evil Thatcherite attitudes are. He told us the best thing now was to abandon economic growth altogether, and learn to live a better non-Thatcherite life. Of course, it's easy for Old Etonian James to say that, since he was born with a whopping great silver spoon in his mouth (said spoon may since have migrated to his arse, from where he now speaks). Not that Mr Naughty mentioned any of that: as per, James was introduced as a "psychologist", with no warning that he speaks for the Hampstead Soviet.

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