Chris Nicholson is Director and Chief Executive of CentreForum, the liberal think tank
The stagnant economy has forced the Office of Budget Responsibility to downgrade its economic forecasts. The structural deficit is now not forecast to be removed until the next Parliament, so the question arises: “what can be done to boost demand and growth in the Budget?” There are calls from some Conservatives for public spending to be cut further and for the savings to be used to fund tax cuts. That would be a mistake.
The coalition government was right to announce cuts in public spending in 2010 to show the financial markets and the public that the government was serious about cutting the deficit. That has been successful as proved by the unprecedentedly low borrowing rates for government. But to cut total public spending further would suck demand out of the economy and harm growth.
Tax cuts for low and middle income earners are necessary but should be funded by removing tax reliefs and allowances for the well off and by taxing wealth, as both Tim Montgomerie and I have argued before on Conservative Home. However, there are certainly areas where, within the present public spending framework, spencing could be cut but also areas where it could be increased.
So let me outline a couple of areas where spending should be cut – areas which many Conservatives might find difficult but which should be tackled nevertheless.
David Willetts in his excellent book “The Pinch: How the Baby Boomers Took their Children's Future – and Why They Should Give it Back” highlighted how the baby boomers were forecast to take out about 120% of what they put in and that younger generations were those who would pay the price. Much of our tax and welfare system favours the old at the expense of the young. It is time we redressed the balance.
The Winter fuel allowance and free bus travel
It makes no sense that winter fuel allowances and free bus travel start at age 60. They should be raised immediately to 65 and then rise in line with the state retirement age. These benefits and free TV licences for the over 75s should be strictly means tested and should not be available for those pensioners who receive enough income to pay tax . Latest DWP figures show that around half of all pensioners receive in excess of the income tax threshold. By restricting the winter fuel allowance, free bus travel and free TV licences to those below the threshold, a saving to the Exchequer of around £1.4 billion pa could be generated.
Statutory maternity pay
The government has already cut child benefit for the relatively well off but that should just be the start. We should be looking to tackle other aspects of benefits for the rich. Currently the government spends over £2 billion per annum on statutory maternity pay (SMP). For the first six weeks after birth a mother receives 90% of their average gross weekly earnings income whether they earn £100,000 or £10,000. That makes no sense. It should be capped at £800 per week (roughly the income level of those who pay higher rate tax of 40%).
There are currently 6000 people, such as Bob Crow, who live in social housing and earn over £100,000 per year. There are many more who pay tax at 40%. They should be paying the full market rent for their housing. Such a policy could save the taxpayer in excess of £100 million pa.
Also at a time when we are being forced to make tough choices perhaps we should be looking at other aspects of the welfare bill. Extending disabled people who lease cars from Motability can have a new car every three years. Extending the lease to six years would save approaching £500 million.
In total, savings along these lines could generate in excess of £2 billion per annum, which could be re-invested in early years provision and help to get the young unemployed into work. In more benign economic times we might not wish to make these choices but in these difficult circumstances we must invest in the future of our country – our young people.
Anoher area where spending priorities should change is in defence. At a time when our conventional forces are facing unprecedented cuts it makes no sense to be wasting money on pointless status symbols like Trident replacement. This will serve no credible military or strategic purpose as Toby Fenwick argues in a recently published CentreForum paper Dropping the bomb: a post-Trident future. This could save around £3billion capital costs in this Parliament and over £25 billion capital costs in total, which could be spent on much needed equipment for our hard-pressed army, navy and air force.
Most senior military officers if asked the question “Would you prefer to spend £25 billion on conventional forces or replacing Trident?” would give a very clear reply in favour of the former. So why on earth are we proceeding with this vanity project? I realise many of these suggestions may be difficult for Conservatives to accept. But for the good of the country they should do so.