SEVERAL commentators recently have noted that public spending is set to rise in cash terms. Even after adjusting for inflation, total managed expenditure is set to fall by only 3.6 per cent. Can this really be so tough?
Answer: emphatically, yes. Even at the overall level, a fall of 3.6 per cent is very significant. The maximum peak-to-trough cuts Mrs Thatcher achieved were 3.1 per cent, and that was during the mid-1980s boom when unemployment was falling and so benefits costs dropped. The largest inflation-adjusted cuts achieved since WWII were those imposed by the IMF in the mid-1970s – four per cent – but these only lasted two years before spending rose again, whereas the coalition cuts programme will involve cutting for four straight years.
DEEPER THAN THATCHER’S CUTS
So the coalition cuts are going to be deeper than Thatcher’s, without the benefit of a boom, and much longer-lasting than the IMF’s. But this only scratches the surface of the challenge. For a start, the UK’s recent deficits have been unprecedented, meaning that debt interest costs will surge, so cuts in the rest of spending will be much larger. Cuts in departmental spending will be about 13 per cent.
Then, of course, there are the ringfences to NHS and international development spending, meaning that non-ringfenced spending must fall about 25 per cent. Given that Defence appears to have settled for about eight per cent cuts and the schools budget has been ringfenced, that means cuts elsewhere are likely to need to be around 35 per cent. That will mean some combination of pruning back right to the base in those departments such as Business, Local Government, and Energy, where there is considerable discretionary spend, and fundamentally unpalatable cuts elsewhere.
Imagine the political reaction even to plausible cuts such as to budgets for after-school and breakfast clubs, science research, the Olympics, higher education teaching, the Technology Strategy Board, and the policing budget. And that is before we consider the unpalatable cuts that would prove necessary to meet a 35 per cent target — such as cutting the local government grant by a quarter to a third; the prisons budget by a blunt 20 per cent; and policing budgets by as much as 20 per cent.
NO EASY CHOICES
There are no easy choices here, but some decisions have made matters harder. What justification is there, really, for protecting the bloated NHS budget – up one third in real terms over the last parliament alone – from any cuts while cutting budgets enormously that had not risen at all over the last parliament?
Obviously the Conservatives made pre-election promises to ringfence NHS spending, but the Liberal Democrats made pre-election promises not to support tuition fees. What is the difference? Why weren’t the arguments that “matters were worse than we thought” relevant to the question of whether NHS spending could be cut? Refusing to cut in the areas where spending had risen most – health and education – is bound to result in avoidable unpalatable cutting.
That leaves the welfare budget. This was clearly too high – principally because having five million people on out-of-work benefits at the height of the boom was a huge policy failure of the last administration.
Can the coalition produce credible plans to reduce the numbers of welfare recipients, to limit the pain for departments that had not previously had large spending rises while still ringfencing spending where the spending rises before were the largest? Only George Osborne can tell us.
• Andrew Lilico is the chief economist of Policy Exchange.