Public sector ‘efficiency’ will help pay for tax cuts

20 Nov 08
The public sector is set to face increased demands for efficiency savings to make up for the chancellor’s Pre-Budget Report tax handout

21 November 2008

By Tash Shifrin

The public sector is set to face increased demands for efficiency savings to make up for the chancellor's Pre-Budget Report tax handout.

Economists have warned that a 'squeeze' on the public sector would follow borrowing to finance the £500bn banking bail-out, with the independent Institute for Fiscal Studies noting that this would be 'a question after the next election'.

Chancellor Alistair Darling is expected to announce the tax cuts in his PBR speech on November 24, following Prime Minister Gordon Brown's urging of a similar 'fiscal stimulus' policy on his international counterparts at the G20 summit.

Darling is also expected to flesh out his plans to 'bring forward' planned public sector spending on infrastructure projects, although this could be limited by the technical and financing difficulties of speeding up complex procurements.

But a crucial element of the PBR will be Darling's plans for returning public sector borrowing to a 'sustainable' level when the economy recovers. In his October 29 Mais lecture, the chancellor promised that the PBR would 'demonstrate our commitment to keeping the public finances on a sustainable path' and 'ensuring that we live within our means in the medium term'.

A new round of Gershon efficiency savings is expected to form part of Darling's remedy after being heavily trailed by senior government figures. The chancellor will report on Chief Secretary to the Treasury Yvette Cooper's review of the Gershon programme. Cooper told the Cabinet this week that the programme had saved £26.5bn over the past three years – £5bn more than the original target.

Speaking ahead of the PBR, Darling told the BBC: 'We need to be more efficient and we will be more efficient. We are already exceeding the targets we set ourselves for government spending, in making ourselves more efficient and cutting back on waste. I think we can do a lot more and on Monday, at the Pre-Budget Report, I will be setting out what more I think we can do.'

The public sector will also face a squeeze in the next two to three years if the Conservatives are returned to power after the next general election. Tory leader David Cameron set the ground for the PBR debate with an attempt to put 'clear blue water' between his party's policy for tackling the economic crisis and that of the Labour government, publicly ditching the Conservatives' commitment to keep to Labour's spending pledges.

Government borrowing and the PBR tax cuts would produce a 'tax bombshell' further down the line, Cameron warned, adding: 'Labour's economic mismanagement makes it vital for the long-term health of our economy that we set a new path for restraining the growth of spending.

'That means for the year 2010/11, we need change, not more of the same. That means reducing planned government spending growth, and not matching Labour's spending plans.' Spending increases for the years beyond 2010/11, outlined by the chancellor last year, were now 'unsustainably high', he said.

The political polarisation comes as grim economic indicators once again outstripped forecasts in the run-up to the PBR. October figures released by the Office for National Statistics on November 18 showed Consumer Price Index inflation falling by more than expected, dropping from 5.2% to 4.5% – less than a week after the Bank of England warned of the danger of deflation.

The CBI's latest Industrial trends survey, published on November 19, gave a fresh signal of the severity of the recession, as business leaders warned that manufacturing output for the next three months would be at its weakest for almost 30 years.

But the arrival of the PBR, delayed by the outbreak of the banking crisis, will also unblock a pipeline of finance and planning guidance that has been held up while Whitehall waited for news from the Treasury.

The NHS's much-delayed operating framework, a new allocation formula and treatment tariffs are expected to be released in the wake of the PBR, allowing health service finance chiefs to plan for 2009/10.

Alongside the PBR, the National Audit Office will release its audit of the government's assessment of the economic cycle, which Darling has said ended in the second half of 2006. The NAO verdict is set to be scrutinised acutely by economists and the opposition parties, seeking to test the chancellor's claim that the government met its self-imposed fiscal rules 'over the past cycle'.


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