By Lucy Phillips
4 February 2010
A consensus is building among politicians and economists that further cuts to public spending should be put on hold for a year.
The Institute for Fiscal Studies’ annual Green Budget warned that more tax increases or public spending cuts this year would put economic recovery at risk, particularly after the UK came out of recession last month with just 0.1% growth.
But the think-tank also issued a caution to any incoming government that measures for fiscal tightening would need to be ‘somewhat more ambitious’ than those set out in December’s
Pre-Budget Report.
Politicians would need to find £13bn more in tax increases or spending cuts over the next five years than the £57bn already identified.
The IFS’s warning came as the Tories backtracked on plans, if elected, to make immediate and deep public sector cuts. In a February 2 speech setting out the Conservatives’ new economic model, shadow chancellor George Osborne limited his ambition to ‘making a start’ on reducing spending this year.
The government has always argued for a more modest approach, claiming early cuts could plunge the economy into a double-dip recession. The Liberal Democrats agreed further cuts this year would be ‘extremely dangerous’, with Treasury spokesman Vince Cable adding: ‘It is no surprise that the Tories are now desperately trying to play down their desire to do just that.’
Carl Emmerson, IFS deputy director, told Public Finance that making ‘swingeing cuts’ in 2010/11 would not be a good idea because the government had already begun reducing its fiscal support package (unlike most other G20 countries) and it would be difficult to make changes after the start of the financial year.
‘If you cut heavily then you cut what you can, not what you should. It would be better to focus on April 2011 and come up with a sensible plan to reform public services, cut benefits and increase taxes – if that’s what they [the Tories] want to do – so as to achieve the savings as best they can, rather than seek cheap pounds,’ he said.
Emmerson added that if the Tories were worried about appearing not to have a credible plan, ‘by announcing lots of pain for later years, you can be credible’. The IFS criticised all parties for a lack of detail on how they would plug the public deficit, urging them to plan for different market scenarios.
Patrick Nolan, chief economist at the think-tank Reform, told PF that slashing public spending now or later was a ‘false debate’ since the bulk of cuts could not happen ‘overnight’ because they would require departmental and union negotiations.
But he warned that any government needed ‘to move swiftly to reassure the markets that something is going to be done’. He added that welfare payments such as the child trust fund could be cut immediately ‘to indicate we are serious’.
Regardless of the timing of the cuts, the IFS sketched out a gloomy scenario for the future of public services. Between 2011 and 2015, spending will be at its tightest since the late 1970s, according to their estimates. And the NHS will experience the tightest two-year squeeze in its 60-year history, despite the government’s commitment to protect spending in real terms during this period.
IFS research economist Rowena Crawford said: ‘The UK has never had three consecutive years of cuts, let alone the five that are forecast.’
Public sector unions reacted to the IFS forecast with concern, urging ministers to plug the deficit through tackling tax avoidance, raising tax on high earners and cutting spending on the Trident
missile project, as opposed to cutting jobs.
A spokesman for the civil service Public and Commercial Services union said: ‘If you choke off public spending in 2011, it could push us into a double-dip recession then as opposed to now. There are more ways of closing the deficit than purely cutting public services.’
PCS union members, who are currently being balloted for strike action over changes to the civil service compensation scheme, were ‘fearful for their futures’, he said.
‘Whichever party gets in, it’s going to be extremely tough for civil servants. At the moment there’s a Dutch auction going on to see who can cut the most without thinking through the consequences.’
A spokeswoman from Unison said that ‘cutting services that people depend on would plunge us back into recession’ and that they feared the Tories ‘would probably cut deeper and further’ than Labour.
But Nolan said there was ‘scope for more for less’ in the public sector, and ‘employing more people doesn’t necessarily make public services better’.
In a separate study, also published on February 3, the National Institute of Economic and Social Research said it expected the economy to grow at a slower pace than Treasury forecasts.
Tighter spending controls would be needed if the government were to meet its goal of halving the budget deficit over the next four years.
4 February 2010
A consensus is building among politicians and economists that further cuts to public spending should be put on hold for a year.
The Institute for Fiscal Studies’ annual Green Budget warned that more tax increases or public spending cuts this year would put economic recovery at risk, particularly after the UK came out of recession last month with just 0.1% growth.
But the think-tank also issued a caution to any incoming government that measures for fiscal tightening would need to be ‘somewhat more ambitious’ than those set out in December’s
Pre-Budget Report.
Politicians would need to find £13bn more in tax increases or spending cuts over the next five years than the £57bn already identified.
The IFS’s warning came as the Tories backtracked on plans, if elected, to make immediate and deep public sector cuts. In a February 2 speech setting out the Conservatives’ new economic model, shadow chancellor George Osborne limited his ambition to ‘making a start’ on reducing spending this year.
The government has always argued for a more modest approach, claiming early cuts could plunge the economy into a double-dip recession. The Liberal Democrats agreed further cuts this year would be ‘extremely dangerous’, with Treasury spokesman Vince Cable adding: ‘It is no surprise that the Tories are now desperately trying to play down their desire to do just that.’
Carl Emmerson, IFS deputy director, told Public Finance that making ‘swingeing cuts’ in 2010/11 would not be a good idea because the government had already begun reducing its fiscal support package (unlike most other G20 countries) and it would be difficult to make changes after the start of the financial year.
‘If you cut heavily then you cut what you can, not what you should. It would be better to focus on April 2011 and come up with a sensible plan to reform public services, cut benefits and increase taxes – if that’s what they [the Tories] want to do – so as to achieve the savings as best they can, rather than seek cheap pounds,’ he said.
Emmerson added that if the Tories were worried about appearing not to have a credible plan, ‘by announcing lots of pain for later years, you can be credible’. The IFS criticised all parties for a lack of detail on how they would plug the public deficit, urging them to plan for different market scenarios.
Patrick Nolan, chief economist at the think-tank Reform, told PF that slashing public spending now or later was a ‘false debate’ since the bulk of cuts could not happen ‘overnight’ because they would require departmental and union negotiations.
But he warned that any government needed ‘to move swiftly to reassure the markets that something is going to be done’. He added that welfare payments such as the child trust fund could be cut immediately ‘to indicate we are serious’.
Regardless of the timing of the cuts, the IFS sketched out a gloomy scenario for the future of public services. Between 2011 and 2015, spending will be at its tightest since the late 1970s, according to their estimates. And the NHS will experience the tightest two-year squeeze in its 60-year history, despite the government’s commitment to protect spending in real terms during this period.
IFS research economist Rowena Crawford said: ‘The UK has never had three consecutive years of cuts, let alone the five that are forecast.’
Public sector unions reacted to the IFS forecast with concern, urging ministers to plug the deficit through tackling tax avoidance, raising tax on high earners and cutting spending on the Trident
missile project, as opposed to cutting jobs.
A spokesman for the civil service Public and Commercial Services union said: ‘If you choke off public spending in 2011, it could push us into a double-dip recession then as opposed to now. There are more ways of closing the deficit than purely cutting public services.’
PCS union members, who are currently being balloted for strike action over changes to the civil service compensation scheme, were ‘fearful for their futures’, he said.
‘Whichever party gets in, it’s going to be extremely tough for civil servants. At the moment there’s a Dutch auction going on to see who can cut the most without thinking through the consequences.’
A spokeswoman from Unison said that ‘cutting services that people depend on would plunge us back into recession’ and that they feared the Tories ‘would probably cut deeper and further’ than Labour.
But Nolan said there was ‘scope for more for less’ in the public sector, and ‘employing more people doesn’t necessarily make public services better’.
In a separate study, also published on February 3, the National Institute of Economic and Social Research said it expected the economy to grow at a slower pace than Treasury forecasts.
Tighter spending controls would be needed if the government were to meet its goal of halving the budget deficit over the next four years.
