The axe man has been, by Ian Mulheirn

20 Oct 10
Chancellor George Osborne is hoping that his deficit reduction measures lead to a clean cut. But the difficulties of implementing reform will blunt the blade

Chancellor George Osborne is hoping that his deficit reduction measures lead to a clean cut. But the difficulties of implementing reform will blunt the blade

The long-awaited Spending Review is now complete. While the huge repair job on the public finances is unavoidable, the balance between taxation and spending cuts is a matter of political choice, and the coalition plans to make spending reductions do the heavy lifting.

Is this approach wise? Well, economics is reasonably unhelpful in the debate about how to proceed. There is theoretical and some empirical support for both the government’s approach and the emerging opposition line that taxation should take more of the deficit reduction strain.

Whatever view one takes on the desirability of £83bn spending cuts, setting out such a plan and actually achieving that aim are two very different things. The coalition, not unreasonably, wants to get the pain out of the way well before the next election. This will avoid the country’s fiscal credibility being jeopardised by a general election, with all the unfunded spending pledges they entail.

But there are at least three reasons why implementing this level of cuts might not be feasible by the end of the Parliament.
The first thing that might blunt the Osborne axe is that the public desire for good services might prove too strong. It is clear that the increased spending on public services over the past decade was unsustainable at the prevailing levels of taxation. And polls suggest that a majority of the public favour cutting spending over tax increases to breach the yawning gulf. But that viewpoint in the abstract might change when the reality of cuts emerges.

As people’s incomes rise, they tend to want to spend a higher proportion of it on things like health and education. It’s therefore reasonable to predict that the voting public will ultimately prefer to have a higher proportion of their income or wealth going in tax to fund such services, relative to a decade ago. This is added to the reality of an ageing baby-boomer population placing greater strain on service provision, and that long-term trends seem set against an overwhelmingly cuts-based solution to the deficit.

The second effect that could blunt the axe relates to cost control. From Whitehall, it might seem as though all that needs to happen is for ministers to pull the spending levers and costs will be cut. Unfortunately, in many policy areas, it doesn’t work that smoothly. For example, cutting short-term prison sentences might be desirable for other reasons, but it’s unclear that it will save money on prisons. If magistrates – in need of an ultimate sanction for repeat low-level offenders – increase sentence lengths of just a proportion of those who currently get short prison terms, the resulting cost to the Exchequer will be unchanged. As with many other policy areas, apparently money-saving policy changes can result in higher costs appearing somewhere else in the system.

Third, the public spending axe has been sharpened with a radical reform plan that promises a clean cut with minimal pain. From health and education to criminal justice and welfare to work, the government has embarked on a market-based shake-up of public service provision to boost productivity so that service quality is not compromised by cuts. In principle, these reforms are to be welcomed: broadly speaking, greater choice and competition will produce better performance for less from the government’s agents. And paying contractors by results can get better value for public money in areas where competitive pressures are otherwise weak.

But reform is difficult. The previous government spent much of the past decade trying to design effective public service markets, yet in many areas, such as welfare to work, those changes remain a work in progress. For the coalition, much rests on getting an even more radical agenda right first time. It’s in everyone’s interests that reform succeeds. But there are grave doubts about whether such ambition can be achieved on the scale and in the time frame the government wants.

So the route to a proportionately lower-spending state is fraught with difficulties. Whether the chancellor’s current plans bear any resemblance to the composition of the deficit reduction in four years’ time is by no means certain.

And if the plan falls short, it will be taxpayers who have to pick up the tab. It might feel as though the end is in sight. In fact, this is where it starts to get interesting.

Ian Mulheirn is director of the Social Market Foundation

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