Friday, September 11, 2009

Cuts - Must We Suffer Another Dunkirk?

Concentrating minds

Today's joint report from the TaxPayers' Alliance and the IOD sets out 34 specific spending cuts that would together save £50bn pa.

Here's the summary (click on image to enlarge):

The cuts include many of BOM's old favourites (perhaps unsurprising since The Bloke was a co-author):
  • Abolish Sure Start - a failed programme (eg see this blog) - saves £1.5bn pa
  • Abolish Building Schools for the Future - wasteful and unaffordable (eg see this blog) - saves £2.3bn pa
  • Scrap the NHS supercomputer - unwanted, way behind schedule, and far too expensive (see many previous blogs, eg here) - saves £1.2bn pa
  • Halve spending on consultants (eg see this blog)- saves £1.1bn pa

However, as you will see, the biggest proposed savings come from abolishing universal child benefit (estimated net saving of £8.4bn pa from switching to means tested system with all benefit lost for families earning over £50k pa), and a two year freeze on public sector pay, saving a cumulative £12.4bn pa.

It goes without saying that none of the proposed savings are painless. Even if it's only consultants losing their government contracts, spending cuts always involve somebody feeling pain. And we should never expect they'll simply grin and bear it.

At this very moment, Tyler is listening to the TPA's Matt Sinclair being lambasted by listeners to BBC R5, calling to say that abolishing Child Benefit for families earning over £50 grand would be cruel and unnatural. People on fifty grand do not consider themselves rich, and they don't see why they should be whacked. "We don't think the money should be taken from us," they say. "We think it should come from the rich".

Of course, fiscal sophisticates like you and I understand that there aren't enough rich Rich people to go round, and that in reality, an annual income of £50k pa puts a household in the top 20% of the income distribution (see here) - ie by the standards of the other 80%, they are the rich. But that doesn't alter the way £50k households feel about the prospect of losing their Child Benefit.

So what if we can't cut spending?

Yes, that's right - taxes will have to shoot up. And as it happens BDO Stoy Hayward have just produced a useful report looking at what that might mean.

They've combed through the various pronouncements of the three main political parties and come up with the following menu of tax increases to raise £16bn pa (click on image to enlarge):

There are a couple of points to make.

First, none of these tax increases are any less painful than cutting Child Benefit - it's just that the pain may fall on different people.

And second, £16bn is nowhere near enough. If we scaled it up to the £50bn offered by the TPA/IOD proposals, we'd be looking at the following possibilities:

  • 25% VAT
  • 30% Capital Gains Tax on your first home
  • 6 percentage points increase in National Insurance rates (total employers and employees contributions)

Wonder how R5 listeners would react to that lot?

The truth is we are in a very bad place, and we can't stay here. Either we cut spending or we have to increase taxes. A lot.

Our problem is that most of us have not yet understood our plight. We're not yet ready to face facts and recognise we'll all have to make sacrifices. We're in the Phoney War and Dunkirk hasn't yet happened.

But watch this space. If the bond and currency markets turn on us - believe me - subjecting child benefits to means testing will be the least of the sacrifices we'll have to make.

And not everyone will get off the beaches.

1 comment:

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