Labour and Conservative spending plans are not too different in reality, but the success of their respective policies can be judged only over the longer term
The pain is coming for the public sector. The only questions are when and how much. Ahead of the Pre-Budget Report, the government and the Opposition are competing to offer their plans for reforming public services and, incidentally, cutting back spending.
Details about the forthcoming white paper on ‘smarter government’ from Chief Secretary to the Treasury Liam Byrne have been leaked (and privately confirmed). At the same time, Philip Hammond, his Conservative shadow, gave a recent speech on ‘doing more with less’. The striking feature about both is how similar they are in goals, if not details.
Both parties want to show they are serious about reducing the cost of the public sector. The white paper will propose cutting the cost and number of quangos; reducing senior civil servant staffing levels; merging backroom operations of some departments; and shifting more civil servants out of London (though little more than a quarter are still in the capital).
The aim is to release £9bn a year by 2013/14. This sounds very like Tory proposals for a bonfire of the quangos and to reduce the cost of the civil service through pay freezes and pension age increases. Hammond has gone further in urging sustained action to improve productivity and hence hold down costs, to introduce more competition into contracts and to extend payment by results.
The Tories believe that spending cuts should go further and faster than Labour proposes: that action must begin in the next financial year to maintain the confidence of the financial markets.
The government argues that the fiscal stimulus should not be reined back too soon because of the continuing fragility of the economy. Ministers say that premature spending cuts could undermine any recovery next year and result in a renewed recession. So fiscal and monetary relaxation should continue for some time before the clawback begins.
The contrasts between the parties have, however, been exaggerated in the pre-election propaganda battle. Of course, there are differences in values, priorities and views on public services, equality and redistribution. But there is no real dispute that spending plans will have to be cut back over the course of the next Parliament.
For all the Tory emphasis on the need for action sooner rather than later, there are limits to in-year cuts, those that can be introduced within the financial year. Immediate cuts, freezing public sector pay and cutting cash budgets are largely symbolic first instalments.
What really matters is less when cuts take effect than the credibility of the overall plans. Will they rein back the size of the public sector and be sustainable?
If you look back to the election of the Thatcher government in May 1979, the public finances were also in disarray. The causes were different: then the impact of the second oil price shock and rocketing inflation; now, the big hole in public finances caused by the banking crisis. But there are similarities in the time it takes to put the public finances right – which are discussed in the report I have written with Catherine Haddon, Transitions: preparing for changes of government.
The Thatcher government took early decisions to link welfare benefit increases to prices rather than earnings; to cut council housing subsidies and to sell off council houses; and then, more gradually, to develop what became the privatisation programme. Initially, the benefits were overshadowed by the adverse cyclical pressures of the high inflation and recession of the early 1980s. But when the economy recovered, the earlier decisions had a cumulative positive impact from the mid-1980s onwards
Similarly, the real test now is the long-term impact. There will also have to be cuts in what politicians like to call frontline programmes. But no party is willing to spell out the implications ahead of the election for fear of frightening voters. The main equivalent to privatisation is cutting back public sector pensions, though any savings here will not appear for many years.
The other missing element is taxation. One of the main reasons for the soaring structural deficit is the big hole in public sector revenues. So for all the talk of reining back spending as the priority, any credible solution will require higher and new taxes. But do not expect candour here either before the election.
Peter Riddell is chief political commentator of The Times and a senior fellow of the Institute for Government. Transitions: preparing for changes of government is available at www.instituteforgovernment.org.uk
