Economists cast doubt on Osborne’s cuts package

8 Oct 09
Much more dramatic spending cuts than those already signalled are inevitable if the Conservatives are serious about reducing public borrowing, economists have warned
By Vivienne Russell

8 October 2009

Much more dramatic spending cuts than those already signalled are inevitable if the Conservatives are serious about reducing public borrowing, economists have warned.

Shadow chancellor George Osborne this week set out a package of public service restraints that would save £7bn a year by the end of the next Parliament or £23bn over the lifetime of the Parliament.

These would include a pay freeze for all public sector workers earning more than £18,000 in 2011, with the exception of military personnel on active service. The Conservatives also want to slash the costs of Whitehall bureaucracy by at least a third.

‘Britain cannot go on like this,’ Osborne told the Conservative Party conference in Manchester on October 6.

‘We are sinking in a sea of debt. I believe it is a terrible mistake to claim, as Gordon Brown does, that there is a choice between getting to grips with the debt and having an economic recovery… We need to show political leadership and take the difficult decisions.’

But Gemma Tetlow, senior research economist at the independent Institute for Fiscal Studies, cast doubt on the robustness of Osborne’s plans. She said that, while the proposal to freeze public sector pay was well costed, there was a lack of detail behind plans to cut back on Whitehall red tape, which made them ‘much harder to cost’.

Even if the Whitehall savings were achieved, they only went some way towards making up the £36bn of spending cuts needed to meet the planned 3.2% fiscal tightening set out in this year’s Budget, she said.

‘The [Conservatives’] £7bn is in the context of that £36bn spending cut so it goes some of the way, but not all of the way,’ Tetlow told Public Finance.

She added that the Conservatives had suggested they wanted to bring borrowing down more quickly than the government plans.

‘They would still need to announce more [cuts] if they want to go further and do things more quickly,’ she said.

The Conservatives also want to bring forward planned increases to the pension age, raising it from 65 to 66 for men in 2016 and for women in 2020. The party cited National Institute of Economic and Social Research figures that show that for every year the pension age is increased, government borrowing is reduced by two-thirds of a per cent of gross domestic product, saving £13bn.

But the NIESR cautioned that a change to retirement age had to be accompanied by changes to the benefits system and a campaign to persuade people to stay in work for longer.

‘A simple advance of the retirement age for men and women by one year in 2016 will not achieve this [£13bn saving],’ the institute said.

‘Indeed, if the age at which the Minimum Income Guarantee becomes available (currently 60) is not increased at all, then the rise in the state pension age would have very little impact.’

Tetlow also expressed scepticism about the £13bn savings. ‘I tend to think it’s rather high,’ she said.
Savings would not begin to accrue until the Parliament after next.

‘It doesn’t make it not the right thing to do; it does make sense to look at the long-term picture, but it doesn’t help to achieve fiscal tightening in the short term,’ Tetlow said.

Discussion of where further cuts could be found dominated a fringe meeting, co-hosted by CIPFA and the Social Market Foundation, held in advance of Osborne’s speech. Former Conservative Welsh secretary John Redwood spelt out a litany of the cuts that he would make.

These included a public sector staff freeze, reduced office accommodation, a review of the core functions of government, an ‘immediate axe’ to public relations and advertising activities and a reduction in the number of special advisers.

There was still a lot of ‘low-hanging fruit’ to be picked, Redwood said. ‘We will have to cut some capital spending,’ he added. ‘Politicians want better-run public services, but when one-third of your cost is not supported by revenue, that’s not a good place to be.’

Redwood’s harsh remedy was challenged by other participants, who cautioned against demoralising public sector workers.

CIPFA chief executive Steve Freer said: ‘If we have the mantra of “private sector good, public sector bad”, it becomes demotivating and you don’t get [staff] ideas and engagement.’

Charity Commission chief executive Andrew Hind added: ‘It’s a mistake to imply that public sector managers don’t want to find ways of delivering public services more cheaply.’ Redwood criticised these attitudes as ‘defensive’.

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