Mark Littlewood: The Government is rightly getting the public finances under control - but the Spending Review could have been far more radical

Mark Littlewood is Director General of the Institute of Economic Affairs.

The Comprehensive Spending Review deserves a cheer and a half, but not much more than that. The Coalition has developed a welcome single mindedness in getting the public finances under control, but they could have been both more radical and more methodical. They seem to have tackled deficit reduction in a tactical, rather than a strategic fashion.  The blue skies thinking, which was promised at the time of the emergency budget, has either not really taken place or has not been overly imaginative.

To consider the upsides first, the review does underscore the determination of George Osborne – and the Government more widely – to depart from the reckless spending largesse of recent years. If we were hurtling towards a Greek-style meltdown, this has most probably been averted.

Both the Conservatives and the Lib Dems have shown some courage in departing from their wildly optimistic manifesto pledges to face up to economic reality. This may raise issues about how – just six months ago – a wide-ranging discussion about public spending was essentially ducked in the General Election campaign, but at least we have a government that seems to be dealing with the world we actually live in, rather than the world as they would like it to be.

But it’s on the question of necessity that the Coalition has been rather disappointing. In this instance, it has not proven to be the mother of very much invention.

A truly radical approach to public spending would have seen much more restructuring. Whole departments – and vast swathes of programmes – should have been abolished entirely rather than being trimmed back by 20% to 25%. For example, DCMS could have been collapsed into the Home Office and BIS could have been folded into Education and Treasury. The Coalition seems to have accepted the basic parameters they inherited from the previous administration and sought to make savings within them rather than fundamentally recasting the way the public sector works.

The impression given is that the Coalition would rather not be making any cuts at all. These are, we are basically being told, difficult and unpleasant decisions for troubled times. One is left with the nagging impression that if the public finances were in a healthy state the Government wouldn’t see fit to cut back anything much at all. This is a difficult political balance to strike, of course. Even those of us ideologically committed to a much smaller state are conscious that many tens of thousands of our fellow countrymen are going to lose their livelihoods in the weeks and months to come. On a very human level, it seems inappropriate to punch the air with glee at such a prospect.

Nevertheless, a more optimistic and forward-looking narrative should be possible. Conservatives and true liberals surely want to roll back the state from the obscene and pre-eminent position it has assumed in our society. The real challenge is to make sure that the private sector can move in and fill the gap. This is absolutely not a call for targeted subsidies or some daft new industrial policy. Far from it.

What’s needed is a serious and comprehensive supply-side strategy to remove the dead hand of the state from private enterprise.  In virtually every area of life, the private sector is a more efficient provider of goods and services than the state. But the true potential of British businesses will not be unleashed without a full scale assault on red tape, regulation, the tax code and restrictive employment laws. If up to half a million public sector workers are about to lose their jobs – and perhaps as many private sector workers who are dependent on public sector projects – we need to make it as easy as possible for companies and businesses to re-employ them. This, combined with a firm commitment to cut taxes rather than increase spending as economic circumstances improve, is the best way to insure against a double-dip recession and to build on the still fragile recovery.

The Coalition has really only addressed one side of the equation so far – public spending. It needs to swiftly turn its attention to liberating the private sector. The fact that British tax legislation stretches to 8,000 pages – several times the length of War and Peace – costing businesses up to £20 billion a year just in compliance costs is madness.  The recent equalities legislation will deter employers from expanding their payrolls, as would an extension of maternity leave. The national minimum wage should not be considered sacrosanct either.

If the Government believes they have set Britain on the road to recovery merely by displaying some modest fiscal rectitude, they are likely to come unstuck. The next task is to ensure that Britain is an attractive and dynamic environment for business. If they can start to get that right, then there really will be grounds for optimism about our country’s future. But at the moment, that’s a very big “if”.