Andrew Haldenby: The Government should cut spending rather than raise taxes. Here's how to save £7 billion from health and education.

Paul Goodman recently called for a 'Lower Spending Commission' to help the Chancellor deliver his deficit goals and finance job-creating tax relief. Throughout this week think tanks will be rising to the challenge with suggestions for saving money. The Reform think tank kicks off the series.

Andrew Haldenby is director of the independent think tank Reform.

The tax and spend debate is in a bad place as the Budget approaches.  If the various newspaper reports are to be taken seriously, the Government’s key dilemma is exactly how best to levy more taxes from the very rich.

Even if the 50p rate were to go, it would (in effect) simply be replaced by a mansion tax, or a change in council tax, or a reduction in tax relief for pensions, or a further increase in tax on “non-doms”.

Such a Budget would certainly generate some headlines but nothing really would have changed and certainly no economic benefit achieved.  Given what this Budget actually needs to do, such a shallow set of reforms would be a somewhat tragic missed opportunity.

The future of the 50p rate was put directly to Jeremy Browne, the Foreign Office Minister, at a Reform conference last Thursday.  Jeremy’s answer was reported in the Telegraph (my translation of his words: it must go but only when the politics are right).

But actually the best answer came from Ruth Richardson, the outstanding former Finance Minister of New Zealand.  She said that in the end, the level of taxation is determined by the level of spending that has to be financed.  Of course the structure of taxation matters and the Government should be driving towards broad tax bases and lower rates.  But the spending side of the equation is absolutely essential and deserves far more attention in the next three weeks that it has received hitherto, even if that discussion might be more challenging for Ministers.

The Government may feel that it has settled the spending debate with the Spending Review, published in October 2010 and, unusually, with definite spending levels by department for the full period of this Parliament.  But the world has changed since the Spending Review and policy should change with it.  Two things have happened: the deficit challenge has become much harder, and the evidence for the positive impact of spending cuts has mounted.

Sir Nicholas Macpherson, the Permanent Secretary to the Treasury, also spoke at the Reform conference.  He reminded the audience that the Treasury forecasts public spending to be even tighter in the first two years of the next Parliament than in this one (which was the key announcement in the Autumn Statement).   The Prime Minister and the Chancellor haven't returned to this territory since the Autumn Statement, so Sir Nicholas's words had a particular impact.  They clearly showed that the Treasury thinks that the deficit reduction challenge has grown in intensity rather than eased.

In her speech, the Home Secretary was the most powerful speaker on the theme that the challenge of achieving value for money can be a spur to the improvement of public services themselves.  Last week, Reform published ten case studies of exactly the same idea in healthcare, largely drawn from outside of the UK.  Spending cuts not have to harm services - far from it.  Where they act as a driver to do things differently, they are improving the quality of services at the same time as reducing their costs.

All of this means that the Government should look again at the protected budgets of health and schools.  Experienced people in both services say that the expectation should be 20 per cent reductions in spending, achieved over a number of years.  It can't be emphasised enough how much these services have grown in size and how recently.  The NHS budget has more than doubled in real terms in the last decade, from around £50 billion (in constant prices) to over £100 billion.  Its workforce has risen by 30 per cent (up to 1.3 million in England) in the same period. Equally the schools workforce has shot up.  In 2001 there were around 70,000 teaching assistants.  In 2011 there were 214,000.

If the Government reopened the Spending Review for the NHS and schools, I think it come to the broad conclusion that it would seek £5 billion from the NHS budget per year for the next four or five years, and £2 billion from the schools budget per year in the same way.  It would highlight the following areas of spending to be trimmed:

• The costs of the NHS workforce, both in terms of headcount and pay.  English GPs are the second best paid in the world, with salaries 3.6 times the average in the OECD (for full details and more discussion, see here).
• The costs of the schools workforce.  The numbers of teaching assistants and the inefficiency of teachers’ working day would be a particular target.
• The Pupil Premium, costing over £2 billions of pounds per year.  Schools in deprived areas have had very big spending advantages for years, alongside consistently poor results.
• The costs of the hospital estate, meaning closures of hospitals and wards.  The reorganisation of stroke care in London (with emergency care shifted from 34 hospitals to eight specialist centres) means that the capital now has stroke care as good as any major city in the world.  Paul Corrigan, the former health adviser to the Prime Minister (Tony Blair) has estimated that the unnecessary costs of keeping all hospitals open is around £5 billion per year by the end of this Parliament.

Savings of this kind would be enough to sustain some changes to taxation, or (which would my preference) to reduce borrowing and so give further credibility to the long term credibility of the deficit reduction effort.  Just as importantly, they would promote better outcomes in public services, exactly in line with the Government’s stated objectives.  They would put the Government’s reform agenda back on the front foot after all the uncertainty caused by the NHS retreat.  The Budget’s big ideas could be that the last Spending Review left some unfinished business, and that tighter budgets are a catalyst for improvement.  Those would be wonderful things for the Chancellor to say on March 21.