ConHome assembled a panel of economic and political experts to summarise their hopes, fears, advice and expectations In advance of George Osborne's statement on the Comprehensive Spending Review this afternoon. They will also all give us their reaction later this afternoon.
The economy would recover better if cuts in the low productivity, Public Sector were greater, and taxes were reduced; the 70/30 apportionment may be deemed politically the best that can be achieved, but if the Private Sector is to grow faster tax reductions are needed.
Quango abolition should be more aggressive but the two areas with the greatest scope for saving are public sector remuneration: (it is a scandal that it has grown to, on average, 25% more than private sector remuneration, even before allowing for much better public sector pensions); and welfare expenditure, bloated by Gordon Brown to buy votes. There is scope to save £100bn p.a. in the combined territories – and now is the opportunity to be bold on both fronts.
Be cautious of means testing benefits – as established by Magna Carta, taxation still rests on consent, where the quid pro quo for higher earners paying much more taxation is universal entitlement to at least most benefits. Means testing can also be costly to administer. Also in limiting benefits avoid obvious unfairness on families as between 1 or 2 earners – for benefits relating to children entitlement should be based on combined family income. Drop the crackpot Graduate Tax which would punish achievement and reward failure; and would also increase the brain drain.
Be prepared to have a row with the EU where ridiculous EU rules have resulted in unreasonable benefit entitlements. Also small business needs massive regulatory exemption.
Finally be careful not to wreck retirement saving: a major long term cause of Britain’s economic problems is that savings and investment have been too low and the economy over dependent on consumption.
The biggest risk to our economy is doing nothing to address the fiscal black hole left by Labour. Whether we like it or not, the bond markets demand action.
Had we failed to act decisively in June’s Emergency Budget, our AAA credit rating would have vanished and interest rates would have soared. Our rapid action has already reaped rewards.
Although total cash spending by the government will actually rise by a cumulative 5% by the end of this Parliament, there will be a real fall of around 4%. This may not sound like much but after allowing for higher interest payments, entitlements and real spending freezes on health, schools and international development, we should expect cuts of almost 35% in other departments. So these cuts – Labour’s cuts – will hurt.
The Chancellor needs to be as compassionate with his words today as possible. Although the electorate understand, they need to be reassured that our actions are in their best interests.
We are right to get this tough fiscal retrenchment out of the way now. We have time on our side and, as long as we follow through with pro-growth economic measures, these combined policies will result in robust job creation and a vibrant economy.
In the Emergency Budget the Chancellor provided the overall spending totals for 2011/12 to 2014/15, compatible with balancing the cyclically-adjusted current budget by 2014/15. He should stick to these totals. If he relaxes them, he will undermine his credibility with the markets. But further tightening is not required and would only serve to put a quite unecessary brake on the economy.
The plans showed that total spending in real terms will fall by 4% over the 4 years from 2011/12 to 2014/15. Such cuts shoudn't send the economy into "double dip".
Within the totals some budgets fare reasonably well. But others will be very badly hit. Given the ring-fencing of the NHS (£122bn this year) and international aid, the likelihood of still rising welfare payments (though there may be more savings here) and the exploding debt interest payments, many departments will be on very thin gruel.
Most are faced with at least 25% cuts in real terms. It seems however that MOD will be partly spared, facing only 7-8% cuts, and education may similarly be given preferential treatment with only 10% cuts. But for the others, including BIS, Communities and Local Government, DECC, the Home Office, Department of Justice and Transport, the medicine will be very nasty indeed.
The most important thing in the Spending Review is absolute resolution in respect of the spending cuts. There must be no suggestion that such cuts might be delayed or "reprofiled". And Osborne should say “We are not currently expecting the economy to turn down again, but if it were to do so that would make it even more important to press ahead with the spending cuts planned. To surrender to the Siren voices, to “unlash ourselves from the mast”, as Alan Johnson has urged, would be disastrous.”
I expect it to impose enormous cuts of above 35% in non-ringfenced departments apart from Defence (8%) and Education (~10%). This will include some blunt and unpalatable cutting that will be extremely unpopular. If they had been wise, they would have given up on the NHS ringfence by now, thereby avoiding the most unpalatable cuts elsewhere. But I’m not expecting them to change that now.
They ought to announce the encompassing of the child benefit reductions planned within a longer-term review of the tax treatment of parents relative to those without dependent children. They also ought to announce the abandonment of the inflation target and its replacement by a price-level target, with house prices included in a new CPI.
Time to see.
What we should have after the Spending Review is announced are the targets for cuts in each of the different departments and more information about how they plan to reach those targets. There will almost certainly still be a lot of uncertainty about some of the details. You can see from the list of quangos to be abolished or retained that Francis Maude released last week that many items are still under review.
We have to hope that the Government will really take the axe to the public bodies and quangos that no one but their staff and some special interests will miss. That won't do the job alone, but every penny saved by scrapping a body like the Carbon Trust is one that won't come from tax or spending measures that hit the pockets of ordinary families.
It is also vital that the Government avoid making a hash of the measures as they did with changes to Child Benefit. They could have cut by more and faced less of a political backlash if they hadn't tried to be so clever in the way they limited the benefit.
The Government know they will be judged on how they handle the response to the fiscal crisis. We will have a better idea of how they are doing this afternoon.
"C'est magnifique, mais ce n'est pas la guerre," remarked the French Marshall Pierre Bosquet, our ally at the time, of the Charge of the Light Brigade. Of course, in broad terms, Chancellor George Osborne is doing the right thing by today announcing measures to wipe out a deficit of £150 billion over the next four years. Amid all the controversy that will erupt over the cuts package, no doubt greatly fanned by the BBC, no one should lose sight of Labour's responsibility for the greatest mismanagement of the nation's finances in living memory.
But grave dangers lie in wait for the Coalition. And I fear that the French Marshall's verdict on the heroism of the Light Brigade more than 150 years ago might yet find an echo in history's verdict on the spending review.
My concerns are twofold. Politically, no one is likely to be pleased by the Chancellor's £80 billion cuts package. Core Conservatives won't like the idea of an aircraft carrier that carries no aircraft. Nor do they like the idea that child benefit is to be axed for higher rate taxpayers – especially if the Chancellor pursues his barmy idea of leaving the £80,000-a-year couple better off than the stay-at-home mother couple on £44,000. Expect him to tweak the numbers eventually to inject an element of much vaunted "fairness" into the equation.
Economically, pitfalls also lie ahead. Smart analysts in the City are pointing out that because the private sector – household and business – is paying down debt at a rate of knots, this is not the time for the Government to apply a savage deflationary squeeze as well. At the least, Mr Osborne should take his foot off the brake for fear of spinning GB Racing into the crash barriers.
The double dip recession is the nightmare scenario, not least because it will wreck the Chancellor's carefully calibrated arithmetic and make a mockery of his deficit reduction plan. The Chancellor's courage is to be applauded. But he should also box clever today.