Osborne only moved us a fraction of an inch towards real budget restraint

Mark Littlewood
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MADDENINGLY, the chancellor seems to have concluded that the best way to cross a chasm is to do so in several leaps. Having failed in 2010 to undertake a truly Comprehensive Spending Review to match his hawkish rhetoric, yesterday he found himself in the position of making another effort to nibble away at Britain’s bloated public sector.

As the coalition based its first attempts at fiscal consolidation on relatively modest savings and over-optimistic growth assumptions, it is now desperately seeing if it can trim spending by a fraction here and there to retain some semblance of credibility.

It now seems realistic to suggest that the government may fail to balance the books until after 2020, potentially five years or more behind its initial target. By that time, we could be looking back on two decades of budget deficits. If the UK government were a company, it would likely be in the hands of the administrators or facing liquidation by now.

In seeking to eventually balance the budget, George Osborne clearly wills the end, but he does not seem to will the means. He is allowing short-term, narrow political calculations to out-trump a sober and rational assessment of necessary spending reductions. Insisting on ever-larger funding for the NHS and international aid may or may not help to “decontaminate” the Conservative “brand”, but it also acts as a barrier to a serious strategy to tackle the deficit.

By effectively ring-fencing health, schools and – for the time being – making no new significant cuts to welfare, the chancellor is protecting around two thirds of total spending from real reductions before he even starts. This is particularly bizarre given that these areas have seen such rapid growth in recent years. The Economic Research Council has calculated that spending on these three big ticket items has about doubled in real terms compared to 20 years ago. Surely, the easiest savings to find would be in these larger areas of spending, especially given the largesse bestowed upon them since the early 1990s. But the chancellor seems hellbent on refusing to pick this low hanging fruit.

Instead, he is trying to salami slice a vast swathe of smaller departments: 10 per cent gets lopped off the Scotland, Wales and Northern Ireland departments; 9 per cent gets cut from Transport; 7 per cent is knocked off the Culture, Media and Sports budget (although “elite sports” are apparently protected); 6 per cent of savings will have to be found at the Home Office. Only spies and spooks can look forward to easier times ahead – the intelligence services get a 3.4 per cent budgetary uplift.

The list of tiny, almost trivial, cuts goes on and on. But frankly, it doesn’t end up amounting to a whole hill of beans. The hoped for savings of £11bn amount to a mere tenth of this year’s budgetary black hole, and much of it will have to be made up of “efficiency” savings. I’m all for government bureaucrats trying to spend less money on printer cartridges, paperclips and photocopying. But if this new-found desire to eliminate waste fails to deliver the billions of pounds promised, colour me unsurprised.

There was one area of the Spending Review, however, which showed some genuine imagination and merits further development – the proposed limits on overall welfare spending. Of course, it will be two years before the cap on this total spending envelope kicks in. Also, state pensions – one of the great timebombs of the next few decades – are exempt.

Nevertheless, Osborne may have found a mechanism to apply downwards pressure on this colossal item of government expenditure. In reflecting on the appalling state of Britain’s public finances over the last few years, various people have wondered whether the UK could adopt some sort of legal mechanism for preventing reckless overspending in future. A couple of years ago, Sajid Javid MP, now rising rapidly through the Conservative ranks as economic secretary at the Treasury, proposed that legislation should be put in place to attempt to cap the national debt.

Britain’s uncodified constitution makes it difficult to impose robust strictures in these sort of areas, because a Parliament cannot easily bind its successors. So the chancellor’s attempt to limit the future welfare bill basically amounts to a protocol or a guideline rather than an iron rule.

A braver, more radical move would have been to apply the cap to total public expenditure, rather than to a proportion of the welfare budget. But having taken action in one area of spending, perhaps the coalition could consider extending it to others. That may just have the effect of starting to incentivise politicians to adopt a more prudent approach to the public finances, rather than to constantly dream up more weird and not-very-wonderful ways to spend taxpayers’ money.

Sadly, overall, yesterday’s Spending Review only moved us a fraction of an inch in that direction.

Mark Littlewood is director general of the Institute of Economic Affairs.