Andrew Lilico is Policy Exchange's Chief Economist.
Cameron and
Osborne are coming under increasing pressure to spell out an explicit list of planned
spending cuts. Some of this pressure,
naturally, comes from their political opponents, but there have also been lists
of cuts propose by, among others Reform (£30bn) and last week the Taxpayers’
Alliance and the Institute of Directors (£50bn). Whilst it is useful for think tanks to produce
ideas for debate, I believe it is a mistake when they go further and demand of
political parties — especially of opposition parties — that they spell out
their own alternative lists. I shall
explain why.
First, we
should note that the lists of cuts set out so far are simply not enough. For headline public spending to fall by the
£65bn or more required, core spending needs to fall by upwards of £100bn,
because in the short-term there will be £35bn or more of additional spending required
as a fairly unavoidable consequence of the recession and the consequent
unemployment to come.
This point
of scale is crucial. If the cuts
required were only, say, £5bn, it might make sense to identify specifically
what they are intended to be. But to cut
£100bn means cutting across an enormous area of public spending. To make cuts on this scale, it is vital that,
before they are committed to in detail, bureaucrats in the relevant departments
have the opportunity to fine-tune the scheme.
Otherwise, what will happen in practice is that some cuts “committed to”
in opposition will prove undeliverable in government. Once that starts to happen, then other
departments or programmes scheduled for cuts will ask why they are being
targeted when others on the supposedly fixed cuts list were spared. The whole programme could quickly unravel.
Next,
spelling out a list of those bearing cuts also, by default, spells out that
those not on the list have escaped. But
in reality no area of government should feel safe when there are £100bn in cuts
to find.
It is
useful to distinguish between so-called “smart” and “dumb” cuts. Smart cuts focus on specific programme
considered wasteful or to involve over-reach by the state. These are the main sorts of cuts provided in
the cuts lists. But to reduce spending
by £100bn, we will also need many dumb cuts – i.e. spending reduction built on
cross-cutting themes such as the general policy towards public sector pay or
pensions or the general approach to procurement. A cross-cutting theme has the potential to
have very rapid wide-spread impact.
Without recommending such approaches at this stage, I note that
suspending all procurement for two years or cutting public sector salaries by 10%
would have immediate and large effects on spending.
Another
form of cross-cutting theme might be a general principle for where cuts should
fall. For example, one might think that
in a case such as this in which spending has risen very rapidly in recent
years, the first question to ask is whether the spending rises made were
excessive. If the answer is yes, it
might be natural to suggest that spending cuts should be mainly a matter of
reversing inappropriate rises. The
implication would be that, for example, the largest falls should occur in areas
such as health spending, where spending increased more than one third in real
terms from 2004/5 to 2010/11, whilst an area such as defence, in which spending
actually fell in real terms from 2004/5 to 2010/11, might have no cuts at
all. As above, the point of this example
is not to recommend the policy, but to explore what we mean by a cross-cutting
theme, though one must wonder whether it can really be right that departments that
have been the main drivers of excessive spending rises be exempted whilst departments
that have not shared in spending rises bear the brunt of the spending cuts?
Lists of
spending reductions, formed in opposition, that depend solely on smart cuts
will inevitably be inadequate, will inevitably change once implemented, will
give rise to resentment and a sense of being singled out, and fail to take
benefit of the extensive skill, insight and experience of the bureaucrats on
the ground.
What is needed,
instead of lists, is an indication as to scale – I suggest an indication that
there will be something of the order of £80bn spending reductions to be
announced within two or three months after the Election, to be implemented over
a period of three years, with further reductions considered thereafter. (I also recommend that the Conservative Party
should indicate its intention to identify, initially, about £20bn in tax
rises.) The Party should also indicate
that such cuts will apply right across government, and that nothing is exempt. Further, it would be useful to vivify the
intention to cut with three or four examples of smart cuts and one or two
examples of dumb cuts. Such examples
should not cover remotely the majority of such cuts, but merely be intended to
indicate something of the nature of smart and dumb cuts that will be
implemented.
