The Chancellor’s Budget should follow the example of Portugal, Ireland, Greece and Spain, according to Reform's new Budget briefing. The other heavily indebted members of the EU are already cutting their deficits by cutting the costs of the public sector workforce and cutting benefits and pensions. These ideas should be at the heart of the programme to return the UK public finances to surplus which should start now and last for many years.
The Chancellor faces three tasks in Wednesday’s Budget. The first is to eliminate the structural deficit in the UK public finances and return them to surplus. The second is to secure economic growth and employment so that the cyclical part of the deficit is eliminated as well. The third is to reform the UK public sector so that it achieves greater productivity even after the deficit is eliminated, allowing taxes to be reduced.
The other heavily indebted countries in the EU – Portugal, Greece, Ireland and Spain, also known as the PIGS – are already doing what the UK needs to do. The great majority of public spending lies in benefits and the costs of the public sector workforce, so that is where the cuts must happen. Each of these countries is reducing the costs of the public sector workforce by reductions in both pay, of up to 15 per cent, and headcount. Portugal is increasing the means-testing of benefits and Ireland is reducing public sector pensions.
These countries are also putting up taxes. The Reform briefing advocates a minimum level of tax increases achieved through eliminating the exemptions in VAT, with protection for the poorest households. This would allow the elimination of the 50p rate of income tax and a reduction in National Insurance Contributions in the name of economic growth and employment.
The briefing summarises the plans of the heavily indebted countries as:
- Portugal is means-testing more benefits and cutting the costs of the public sector workforce by 1 per cent of GDP.
- Ireland is cutting the costs of the public sector workforce through reductions in both pay (an average 7 per cent cut for all public servants) and headcount and reforming public sector pensions.
- Greece is cutting the costs of the public sector workforce through reductions in both pay (a 10 per cent cut in total public sector pay), reductions in full time civil service headcount through natural wastage and cuts in short term contracts.
- Spain is cutting the costs of the public sector workforce by 2 per cent of GDP through a pay freeze and reductions in headcount through natural wastage and cuts in short term contracts.
The briefing shows that all parties have to be much bolder about the reform of public services if they are to be more productive. Giving real power to the users of services means lifting all barriers to choice and competition in health and school-level education. All parties need to explain to the electorate the extent of the change in the public sector that is needed.
Further information is available at www.reform.co.uk.
