Ruth Porter is Communications Director at the Institute of Economic Affairs
The very language of cuts has been markedly austere and depressing. It is now well established that the reductions the government will make to overall spending are actually tiny. Carving it back to around 40% of GDP by 2017 will take it to roughly the average amount the government spent under Tony Blair – hardly a radical plan.
The coming budget is the chance for George Osborne to reframe this discussion. If he can find further reductions he can create the conditions that will allow more growth in the economy – through tax cuts and more space for private enterprise. A thriving economy means more jobs, more prosperity, more opportunities for people, better education and better healthcare. Spring is a good time to send a more optimistic message for Britain’s future.
Last year, the Institute of Economic Affairs published a spending plan that included an additional £215 billion of cuts: Sharper Axes, Lower Taxes: Big Steps to a Smaller State. However, this plan involves wholesale reform of the structure of areas such as health and education. Clearly, this is not change that the Chancellor could finalise in this budget.
However, a few of the ideas from that research along with some other suggestions of how spending could be reduced in the short term are outlined below with rough approximations of the annual savings produced. These are just some examples of the areas where further reductions in government spending are possible. Not only would they provide the funding for tax cuts: they would also help create a slimmed down state that functioned more efficiently. Together these examples would mean savings in the order of £30 billion – £35 billion.
- Overseas Aid: The Government has committed to increasing the foreign aid budget to 0.7% of GDP next year. But it already struggles to monitor properly the money that is spent overseas, and with one study suggesting that as much as 40% of military spending in Africa is financed by aid this plan should provoke caution. The economic evidence also suggests that development aid is largely ineffective and can actually increase corruption in already corrupt regions. The case for increasing it is therefore weak. Keeping aid spending at around 0.5% GDP would save about £3 billion.
- Health: Although the government has said it will ring-fence health spending, it should reconsider – there are opportunities for savings here. If it introduced a nominal charge for people when they use health services, it would reduce demand and allow the NHS to continue providing the same (if not improved) level of care with a saving of perhaps around £10 billion.
- Department of Culture, Media and Sport (DCMS): Of course another option open to Osborne would be to close down entire departments. Most of these would require some functions moving elsewhere, but DCMS could be abolished fairly easily, saving around £1.3 billion. This would also have the additional benefit of providing the space for the philanthropic, voluntary and private sectors to get more involved in the arts and sport.
- Welfare: This is obviously a big ticket item. Savings from welfare are difficult in that many require major structural change and resulting behavioural change, and this takes time. In the short-term, though, the Chancellor could at least announce that housing benefit will be reduced to a maximum of 95% of the rent, with this percentage declining gradually over time. This would probably save around £1 billion, and would incentivise households to move to cheaper accommodation. There is a bizarre anomaly at present whereby child benefit (and child tax credit) can allow families get more for a child than is paid to a young adult on Job Seekers Allowance (JSA). On fairness grounds it would make sense to change this. If the government phased in limiting child benefits (including child tax credits) to the amount paid in JSA to young adults this could save perhaps £2 billion in the first year. Given the pay freezes those in the private sector are facing, a one year freeze on benefits and pensions would seem reasonable. This would save around £7 billion. If over time subsidies for new social housing were phased out this could save a further £1 billion in the first year.
- Older people: The government has left older people largely out of the cuts, meaning they have fallen disproportionately on families. At the moment older people are entitled to a range of special privileges (regardless of how wealthy they might be). These include free bus travel (if this were scrapped it would save around £1bn), free TV licences (if these were scrapped it would save around £700 million) and winter fuel allowance (if this were scrapped it would save close to £2bn).
- Environment: The Government has a terrible track record at "picking winners". Cutting the Department of Energy and Climate Change’s funding of low carbon technologies would save around £50 million. Scrapping the Green Investment Bank would reduce government investment in the project by £775 million.
- Early Years Education: The Government has committed to extend the free early education available to 3 and 4 year olds to some groups of families with 2 year olds. If this policy were reversed it could save around £1.5bn.
- Training and education: The Government has said it will extend the compulsory age of education and training to 17 from next year – if this were scrapped it could save around £500 million. It would also allow young people more freedom to make the most suitable choices for themselves.
- Regional Growth Fund: This fund, set up in part to replace the Regional Development Agencies, could be abolished saving around £1.4 billion. There are much better policies the coalition could be pursuing to help the regions, including phasing out national pay bargaining in the public sector.
- Technology Strategy Board (TSB): The TSB is responsible for allocating funding grants to help with development of new projects. This investment is far better undertaken by the private sector which has the incentives and skills to do it better. If the TSB was scrapped it would save around £300million.