Friday, July 31, 2009

So What Would You Cut?

Equipped for every eventuality

Following yesterday's post, a number of correspondents have suggested to Tyler that he can't criticise Cam's lack of clear surgery plans unless he says what he'd cut himself.

As it happens, Tyler is currently working on a detailed cuts package with some like-minded fiscal patriots. We hope to publish it after the summer hols so we'll keep the powder dry until then.

But in the meantime, we might remind ourselves of the cuts package assembled by the excellent Reform (we blogged it here).

Entitled Back to Black, their report identified £29bn of cuts for 2010-11. It featured 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 3b, A400M and Nimrod MRA4) do not contribute to the UK’s modern defence requirements. Saving: £2.7 billion.
  • Abolish the Regional Development Agencies and the regional assemblies. Saving: £1.6bn pa
  • 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.
  • Scrap Train to Gain and Skills for Life programmes. Saving: £1.5bn

They make a number of other proposals, including axing various quangos. Their overall cuts stack up to £29bn in 2010-11, as follows:

In the dire circs in which we find ourselves, these are all eminently sensible suggestions.

And we can see some common themes that we are going to hear a lot more about over the next year.

First, the curtailment of middle class welfare. Or to put it another way, the end of universal benefits and a return to welfare as a means-tested safety net for the genuinely poor.

Second, pay freezes/cuts for public sector workers. And that will include addressing those index-linked final salary pensions we hear so much about.

Third, an all-out assault on quangoland - ie outright abolition for many.

But alarmingly, the Reform cuts don't go far enough. In Tyler's view, we need to find at least another £20bn pa. And a gap of that size will require the kind of emergency surgery we haven't experienced in years.

Which brings us to an issue that even true blue fiscal conservatives disagree about.

To bridge our cuts gap, we have two broad options.

First, we could simply starve the beast - ie implement across the board budget cuts driven by our overall savings target, rather than any specific central programme decisions. That has the advantage of putting the onus on spending departments/agencies to decide how best to make savings, the idea being they are closer to the sharp-end so can make more informed choices.

Unfortunately, the beast has never shown itself particularly adept at making sensible choices, as we saw with the ludicrous Gershon "efficiency cuts". It's quite likely, for example, that the healthcare beast would make savings by simply cutting down on the treatment offered to patients (aka voters).

The alternative approach is the comprehensive programme review process apparently followed in Canada, and advocated by Andrew Haldenby - the very excellent head of the very excellent Reform - himself. As he puts it:

"The wrong course of action would be the kind of panicky, unplanned cuts that we have seen in Britain many times before. This is exactly what people in the public sector are expecting: a crude reduction in their overall budget, in the form of an order from on high to cut spending by a certain arbitrary percentage...

...however appealing it sounds, this would be the wrong approach. Faced with an overall cut in their budget, public-sector leaders will tend to reduce their wage bill by cutting back on higher salaries – getting rid of the most experienced and capable staff. They will also reduce the number of administrators – firing secretaries, for example – but that just forces other staff to waste time on administration. In fact, this kind of approach would make public services less efficient – which is why it hasn't worked in the past."

Now, we do have sympathy with Haldenby's point. It would be far preferable to implement cuts that are directly related to specific policy choices (like the abolition of the Regional Development Agencies). If we can do that, we should.

But unfortunately we may not have time to decide all that: the markets are expecting quick action following the election. And if the 60s and 70s taught us anything it was that new governments need to get on the front fiscal foot quickly. Like, in the first budget quickly.

Cam and Osborne need to deliver a Big £50bn plus Cut straight off the bat next June. It is essential they are seen to grip the problem.

All well and good if they've already worked out £50bn's worth of specific programmes to ditch. But judging from what we've heard so far, we doubt that they will have.

In the circs, the gap will simply have to be filled by blanket cuts.

Of course, Cam and Oz also need to do something else, just as important.

Because any fool can cut public spending. The important longer term question is having made the cuts, how do you then get the public services to perform?

Which is why Cam needs to be much bolder in public service reform.

School vouchers, competing social health insurers, elected sheriffs... we all know the score by now. Post-cuts they will be more important than ever. They offer the only way we can hope to make less go further.

Come on Cam.

You know you are going to win a crushing election victory. But you surely also know you are inheriting a world of pain.

On the back of the biggest spending cuts Britain has ever experienced, the only way you will be able to offer genuine hope is by announcing that reform package you stuffed somewhere in the depths of your desk.

And if you've forgotten where it is, may we suggest you give Mr Haldenby a buzz?

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