Services face deeper cuts as low growth is forecast

17 Jun 10
The public sector is bracing itself for a sobering Budget on June 22, following a dismal economic forecast from the government's new fiscal watchdog
By Lucy Phillips

17 June 2010

The public sector is bracing itself for a sobering Budget on June 22, following a dismal economic forecast from the government’s new fiscal watchdog. 

Growth figures have been downgraded and a higher projected structural deficit of £12bn announced by the Office for Budget Responsibility, which published its first report on June 14.

These prompted warnings that the new chancellor would have to make significantly bigger spending cuts and tax rises than those suggested in Labour’s March Budget.

The independent watchdog, headed by former Treasury mandarin Sir Alan Budd, did, however, predict lower government borrowing than previously forecast. But it concluded: ‘There is a smaller amount of spare capacity and future trend growth is likely to be weaker than was estimated in the March Budget.’

The Institute for Fiscal Studies calculated that George Osborne must now find £85bn in tax rises and spending cuts over the next five years to meet the fiscal target of borrowing only to invest – £34bn more than planned by Labour. The OBR’s figures affirmed previous estimates by the think-tank that cuts to non-protected government departments could accumulate to more than 20% by 2014/15.

Carl Emmerson, IFS deputy director, told Public Finance that the government now faced a ‘more challenging’ situation. ‘We already knew there was a very big hole in the public finances and this tells us that it is slightly bigger. We already knew there was a lot of pain coming and this does not change that.’

Emmerson speculated that the chancellor might make a few early settlements in Tuesday’s Budget, ahead of the autumn Spending Review. Advance funding could be allocated for schools capital to boost the government’s free schools programme, a major policy area for the coalition. Deals may also be cut for ring-fenced areas such as the NHS and overseas aid, he said.

Malcolm Prowle, professor of business performance at Nottingham Business School, told PF that ‘fairly substantial tax increases’ were inevitable in the June 22 Budget, including a rise in VAT. He expected both the public and public sector managers, accustomed to funding increases, to be ‘shocked’ by the magnitude of the spending cuts to come.

He also warned that the machinery of government was not ‘sophisticated enough to cut in the right areas which will have least damage’. He added: ‘We tend to go for fairly crude cuts.’

Prowle described the outlook as very gloomy. ‘A lot of people said five or six years ago that we can’t sustain an economy based on house price inflation and borrowing, which is what we did and this is where we end up.’ 

The Right-of-centre think-tank Reform this week published an alternative Budget, advising the chancellor against ringfencing any budgets. Contrary to government policy it said £20bn of savings could be found in the NHS by lowering pay and limiting free treatments, and £11.5bn from education by getting rid of classroom teaching assistants and increasing university tuition fees. ‘Cuts should reflect those areas where the marginal value for money from spending is lowest and no area should be off limits,’ the report said. Restrictions on benefits for the middle classes would also be necessary to correct the public finances. 

On the same day that the OBR issued its forecast, Deputy Prime Minister Nick Clegg went on the offensive during a speech at the Institute for Government. He made no mention of cuts to public services, arguing that a reduction in benefits and public sector pay and pensions was the most ‘progressive’ option available to government.

Pointing out that the government’s pension bill is set to increase from £4bn to £9bn by 2015, he said: ‘As we face up to living within our means, we cannot ignore an area of spending that’s set to double in the next five years.’

He also defended the government’s decision to cut spending immediately, a move that, before the election, the Liberal Democrats had claimed would derail economic recovery. Citing the turmoil in Greece in recent weeks, Clegg said: ‘Markets have stopped believing that all European governments can service their debts. They’ve started to charge much higher interest rates to those whose plans they distrust.’

Colin Talbot, professor of public policy and management at Manchester Business School, said the OBR’s forecasts had weakened the government’s case for making savage spending cuts immediately – although he expected Osborne to ignore that and claim that things are worse than they are.

Talbot added that the OBR was no more ‘credible’ than any other economic body, and that ‘most of this stuff is tea leaf-gazing, given the state of the world economy’.

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