This morning 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. Here they give us their reaction to the statement:
No change in the quantum of cuts. No re-profiling. No more structural budget deficit, if all goes to plan, in four years’ time. No mean feat. The financial markets took it in their stride. It was spot on, as expected. Interest rates will stay lower for longer and our AAA credit rating is secure – for now. The coalition had an historic opportunity to put the country first and make some long term decisions. And it took its chance.
The key to full economic recovery is to deliver pro-growth measures. Ultimately, only a buoyant private sector will pull us out of this inherited mess. Which is why I was pleased to hear that spending on transport infrastructure will be prioritised and that the science budget will be protected in cash terms. Whilst the bank levy was made permanent, there was, reassuringly, no announcement of any further “anti-bank” measures.
Equally significant was that Osborne put an end to the idea of an ever-growing state. Government will be re-modelled so that it’s an efficient provider of services, not just an inefficient producer. Yes, we could have done more: shelving the unfair Barnett Formula, for example. But we did enough. Hats off to Osborne and team.
In broad macroeconomic terms, there is little to comment on. There was a modest (£2bn) increase in total spending in cash terms, so the overall retrenchment spelt out in the Emergency Budget remains unchanged. The Chancellor, as widely expected, stuck to his guns.
Within the total, savings have been made to Annually Managed Expenditure (principally welfare payments) which have been relocated to departments. But even so, some of the departments facing swingeing cuts. The forecast for debt interest payments is unchanged – rising from £43bn (2010/11) to £63bn (2014/15). £20bn that could have been spent elsewhere or even used for tax cuts. The Spending Review’s toughness is essential. Rising indebtedness had to be tackled. The Coalition Government must now deliver.
George Osborne rightly stuck to his guns over the total consolidation, reducing discretionary spending cuts by only an irrelevant £2bn (all driven by less fall in capital spending). The NHS and DFID ringfences were expected, but that Education was cut only 3.4% over the period was disappointing because we believed there were intrinsically desirable cuts greater than this.
Cuts in most departments lay in the 20-25% range: Transport – 21%; CLG – 27%; BIS – 25%; Home Office – 23%; DEFRA – 29%; DCMS – 24%. Our previous analysis suggests that cuts on this scale should be broadly feasible through a combination of intrinsically desirable and plausible measures, without needing to resort to much that is unpalatable (except the cuts to the Defence budget, which take it back below its 1993/4 level).
The ability to avoid too much unpalatable cutting was the consequence of finding £7bn extra cuts/effective tax rises from the Welfare budget and from Child Benefit, along with rises in public sector employee pension contributions, though it was disappointing (but not surprising) that misdirected programmes such as winter fuel payments survive intact.
There are a number of interesting points from specific departments:
The key DECC story is that about 5000 large, non-energy intensive companies which come under the new CRC Energy Efficiency Scheme need to buy carbon permits from 2012. The cost of these permits will not now be recycled back to companies, as originally proposed, but retained by the Treasury. This will raise £1bn pa by 2014-15.
The 6% savings each year from the Home Office budget (23% by 2014-15) should be delivered relatively straightforwardly. There is big scope for cutting back bureaucracy in Home Office agencies, merging some organizations and scrapping others. A 20% cut to police funding is in reality more like 14%, once one takes account of local funding through council tax. This is slightly more than the 12% that HMIC decided was perfectly possible for forces to deliver, without slashing officer numbers.
The 23% cuts to the Ministry of Justice constitute a bigger hit than the Home Office with this settlement because the savings are harder to find here. The cuts lead to a total budget of £7bn by 2014-2015, but it could have been worse. There are major savings that can be made, in legal aid, in central staffing and in the bureaucratic NOMS empire, but a quarter of the department’s budget is spent on prisons, and this scale of savings can only be realised if prison numbers are less than expected in 2015, so jails can actually be closed, or not built in the first place.
Overall, however, perhaps the most noteworthy point was Osborne’s final jibe that the Coalition is proposing smaller cuts to DELs than Labour. It appears that the struggle to move politicians away from the formulation that “Increased public spending = All that is Good and Virtuous” still has some way to go
It is great news that the Government has announced a good range of tangible cuts which will save a lot of money and mean lower taxes and less money wasted on debt interest over time. Wasteful programmes including Train to Gain are going and there are healthy cuts in departments like the Treasury, BIS and DEFRA.
Unfortunately a number of measures that would save significant amounts of money without hitting the priorities of ordinary families haven't been taken: a freeze in the International Development budget; pay cuts for the best paid public sector staff; scrapping bodies like the Carbon Trust and the Equality and Human Rights Commission.
And in some areas they've introduced new spending. Carbon Capture and Storage and the Green Investment Bank get £1 billion each, for example. That is a lot of money that will have to be found from other programmes or the pockets of ordinary families.
Sensible and necessary cuts have been announced today, but the Government need to do more to deliver good value for hard pressed taxpayers.
A great sigh of relief will have gone up in Whitehall this afternoon now that George Osborne has announced the new spending totals. No longer will departments have to wake up to ghastly headlines about Minister A falling out with the Treasury or Osborne attempting to crucify some benighted colleague. At least the dark cloud of the cuts review is passing over the horizon.
There were few surprises. The nasty and the (few) nice bits of the CSR had been leaked or announced well before today. The pain is being spread around. The middle classes have been clobbered over child benefit, university tuition fees and pensions. The not so middle face a benefits squeeze, although their schools and hospitals have been afforded some protection.
Core Conservatives will be alarmed by the cutbacks at the MOD and comedians will enjoy the prospect of aircraft carriers that don't carry aircraft and are mothballed almost as soon as they have glided down the slipway.
But today's galaxy of numbers won't make much difference. The proof of this plate of gruel will lie in the eating. And that is months if not years away. Six months from now it is a fair bet that the Today programme will have become a parade ground for cuts sob stories and the Government can expect to find itself under mounting political pressure.
Next year is the period of maximum political danger for the Coalition. All eyes will now turn to the economy. If it double dips, then Cameron, Osborne and Co are in deep trouble. If by next autumn, the recovery is well
under way, people will look back on today's balancing act as a political masterstroke, in much the same way as the widely derided Geoffrey Howe Budget of 1981 is now seen as laying the foundations of the Thatcher economic miracle. It didn't look like it at the time.
In terms of the savings which need to be made to restore the public finances, the Government is discharging its promise for which it is to be congratulated.
What is disappointing is that we have a typical 'Whitehall Package' of cuts, missing a once in a generation opportunity for the sort of radical reforms needed to propel the productive private sector economy into better growth and achievement and to reverse the nanny state intrusions of the last 20 years – analogous to the radical reforms of the early 1830s then to address excessive government borrowing and social policies damaging the economy in that era. We need higher savings and investment and – dare I say – an element of mercantilist policy to boost our exports.
I am not in the camp which believes means testing universal benefits is the key reform needed. This would only make sense if and when personal tax rates are reduced substantially. What I believe the UK needs is a fiscal and welfare environment which clearly rewards and incentivises upward mobility, skill acquisition, hard work and personal responsibility rather than the reverse. These are the underlying drivers of China's and India's current success.
Viewed from Asia, sadly the UK looks both to have Its political and economic priorities wrong and to be living in the past where it is rather Asia which will soon need to be helping us rather than the empty gesture of us increasing aid to Asia.
We will face falling standards of living unless we unleash the 'animal' drive to grow the productive economy – Government does still not appear to realise this.