Public sector to bear the brunt of Budget for hard times

8 Jun 09
The public sector faces a £47bn spending squeeze from 2011, along with slashed capital allocations and a renewed efficiency drive as a result of this year’s Budget, experts have warned.

24th April 2009

By Tash Shifrin

The public sector faces a £47bn spending squeeze from 2011, along with slashed capital allocations and a renewed efficiency drive as a result of this year’s Budget, experts have warned.

Austerity in the public sector is also set to continue until at least 2017/18, in an attempt to restore the public finances, the Budget documents show.

In his April 22 Budget, Chancellor Alistair Darling forecast a 3.5% contraction in the economy this year, predicting 1.25% growth in 2010 and 3.5% from 2011 onwards. He admitted that public borrowing would hit a post-war high of £175bn this financial year.

But the chancellor’s figures were attacked as optimistic by economists and Opposition politicians as the International Monetary Fund released a much gloomier forecast. This predicted that the economy would shrink by 4.1% this year and stay in decline, with a 0.4% contraction in 2010.

Darling set out a reduction in current spending growth to just 0.7% for the three years from 2011/12 – down from the 1.2% outlined in November’s Pre-Budget Report, and far below the 1.8% growth figure promised from 2011 in last year’s Budget.

The chancellor has also wiped a total of £15.5bn off investment spending on capital projects between 2011/12 and 2013/14.

Darling broke a Labour manifesto promise by introducing a new 50% tax rate on those earning over £150,000. But the public sector is set to bear much of the burden of filling the hole in the public finances caused by soaring public borrowing and debt.

Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, warned that some elements of public spending after 2011 would grow ‘faster’ – including debt interest payments and social security spending. That would leave other departments with lower than 0.7% spending growth.

An IFS analysis of figures from November’s PBR showed that a total £37bn spending squeeze would leave departments with a real-terms freeze. The new Budget figures represented a ‘significant cut in the spending plans’, she said.

Douglas McWilliams, chief executive of the Centre for Economics and Business Research, said the new reductions in public spending growth ‘would imply a squeeze of about £10bn or so’ on top of the £37bn estimated by the IFS as the cost of the PBR measures.

The tax hike would not help refill the Treasury’s coffers, McWilliams said, arguing that it would produce an £800m net loss as ‘mobile’ top-rate payers shifted their tax base abroad and cut jobs in the UK.

Darling’s Budget speech rubbished Opposition arguments ‘that we should cut public services immediately, rather than invest and grow our way out of the recession’. He promised that planned spending increases of more than 5% for health services and over 4% for schools next year would be maintained.

But the Budget revealed that the £5bn extra efficiency savings for 2010/11 announced in the PBR, in addition to £30bn already planned, would be taken out of public services and returned to the Treasury.

Almost half the additional savings – £2.3bn – will come from the Department of Health, with the Department for Children, Schools and Families contributing £650m.

Public services will also be expected to produce a new round of efficiency savings, worth £9bn a year by 2013/14 to ‘protect frontline public services’ from 2011, when the spending squeeze begins. These were outlined in the Operational Efficiency Programme report published a day ahead of the Budget. The OEP also set out a £16bn programme of asset and property sales, and controversial proposals to privatise the Royal Mint.

Manchester Business School professor Colin Talbot warned that the continuing efficiency regime would damage services. ‘The so-called efficiency savings are now so large that they are in effect stealth cuts, and will reduce the quantity and quality of services,’ he said.

These ‘unrealistic’ savings were more important than the reductions from the funding squeeze, which would produce ‘some cuts – but nothing like as big as the Tories are talking about’, he argued.

Tetlow added that it was ‘not only the richest’ who would pay out in tax rises, with the amount to be raised from fuel duty broadly equal to Darling’s estimated receipts from the new top-rate tax when it is introduced in 2010.

The Budget document also signalled the threat of continuing austerity measures in public services. Darling had ‘pencilled in a further squeeze on the public finances to 2017/18’, Tetlow noted. A ‘lot of that’ might come from holding down public spending as a proportion of gross domestic product, she said.

The outlook for public services will be even bleaker if Darling’s forecasts prove to be too rosy.

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