IFS predicts 25% cut in department budgets

17 May 10
The majority of government departments are likely to have a quarter of their budgets slashed over the next five years as Conservative policy looks set to preside over spending cut decisions
By Lucy Phillips

17 May 2010

The majority of government departments are likely to have a quarter of their budgets slashed over the next five years as Conservative policy looks set to preside over spending cut decisions.

The Institute for Fiscal Studies gave a fresh warning today that Whitehall would experience ‘the biggest sustained tightening since the Second World War’ between now and 2015 if Tory manifesto plans went ahead. These set the ratio of spending cuts to tax rises at 4:1 to cut the fiscal deficit by £71bn by 2015.

Spending cuts in the Liberal Democrats’ manifesto were much lower, at 2.5:1. However, Tory ministers head all the major spending departments in the new Cameron-Clegg coalition government. The LibDems have been given stewardship only of the departments for business and for energy and climate change, which are mid and low ranking when it comes to public spending, and for Scotland, for which the budget is devolved. 

Carl Emmerson, deputy director of the IFS, said the cuts to public services outside the ring-fenced NHS would be ‘very, very deep’ – cumulating at 25% per department by 2015. But he later admitted some of this could be offset by cuts in welfare benefits and by tax rises – neither of which have been ruled out in the coalition agreement.  

Emmerson said the ‘composition of the cure’, or the exact ratio of tax rises to spending cuts, would be determined in next month’s emergency Budget. A more detailed forecast for individual departments would be set out in the autumn Spending Review.

Chancellor George Osborne’s judgement would depend on ‘how big a problem’ was identified by the new Office for Budget Responsibility, according to Emmerson. He welcomed the creation of the independent body, headed by Sir Alan Budd, which he said was likely to produce more realistic economic forecasts than previously by the Treasury. ‘I recommend they use central assumptions and have an explicit margin of error,’ he added.

Emmerson called for the government to produce a five-year Spending Review, rather than a three-year one, to cover the whole parliamentary term and increase its credibility, but with a review half way through.

On the same day, Julian McCrae, a fellow at the Institute for Government, said there was likely to be a bias towards tax increases and cuts in benefits in the government’s fiscal consolidation plan because it simply involved passing legislation. ‘A large parliamentary majority means things that rely on legislation are going to be easier to go through’, he said, adding that difficulties would emerge in negotiations within government rather than within Parliament. 

He also warned that there were few examples of successful fiscal tightening from around the world, particularly by governments with the magnitude of debt the UK had to offset. ‘It’s quite difficult to get a consolidation of this scale right, particularly to get it right first time round,’ he said.

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