By Lucy Parsons, Senior Economics Researcher, Reform
Speaking at the Spectator conference today, George Osborne claimed victory in the debate on public spending cuts. The Shadow Chancellor said that the Conservative Party had taken the “hard path” by choosing to tell the truth that “spending will have to be cut whoever wins the election”.
On the latter point, George Osborne is absolutely right. Reform wrote back in April that the future health of the UK economy and public services depended on the country moving “back to black” and addressing the major cause of the fiscal crisis – namely, excessive public expenditure. All the main parties now see to have reached agreement on this, although there remains a distracting debate over semantics.
George Osborne was also right to say that what this means is that a “credible commitment to cut spending” and get to grips with the UK’s record budget deficit is critical. The latest Sunday Times poll showed that 60 per cent of the public support spending cuts to address the growing hole in the public finances. Yet a credible plan setting out where the cuts would fall and what they would mean for public services is still missing from the Conservatives’ rhetoric.
Today, Reform publishes a paper by Vince Cable which sets out the Liberal Democrats’ plans for public spending cuts. Tackling the fiscal crisis: A recovery plan for the UK goes further than other UK politicians have dared. The paper spells out what a credible commitment to spending cuts really looks out. It means setting priorities in government spending. It means real cuts in many areas. And, critically, it means no ring fencing of particular budgets. The “big ticket” items – health, welfare, education and defence – are where the real savings will be made.
The paper identifies nine areas of potential savings. Public sector pay cannot continue to be immune to the economic downturn. Last year private sector salaries fell by an average of 1.1 per cent and 105,000 jobs were shed, while in the public sector salaries rose by 3.7 per cent and 30,000 new jobs were created. The paper proposes zero growth overall for public sector pay and a 25 per cent reduction in the total pay bill for staff earning over £100,000. In welfare, it sets out the possibilities for scrapping the universal child benefit which essentially takes from the poor and gives to the rich. In health, proposals for reducing the constrictive bureaucracy and central control are advocated, including the abolition of Strategic Health Authorities, strengthening commissioning and supply side reform (in particular tariff reform).
The report also makes some interesting points on curbing the rise of “state capitalism”. A high proportion of single farm payouts go to the biggest and most profitable farmers. The disparity between the cost of defence procurement in the UK and overseas represents a subsidy to the defence equipment industry. As well as looking for the easy cuts – such as ID cards and quangos – the Conservatives should take a real look at proposals on industrial subsidies, in areas like agriculture and defence.
As well as setting out detailed proposals for where the axe should fall, Vince Cable’s plans provide a time scale for the necessary fiscal adjustment. He suggests that a fiscal tightening to the tune of around 8 per cent of GDP over 5 years is what is required. The Government’s proposals for a correction of 6.4 per cent of GDP over 8 years underestimate the size of the structural deficit (assuming an optimistic return to growth of 3 per cent per annum after 2011-12) and fail to address how the tightening will be made from 2014-15 to 2018-19. The Conservatives would do well to set out their own time frame for getting the public finances under control.
Many of the ideas in this paper are not new. But where Vince Cable is once again leading the charge is on setting out a substantial and detailed plan for cutting public spending. His proposals will do much to engage the public in the tough choices the UK faces. This is the kind of credible plan that the public is still waiting to see from the Conservative Party.