Osborne’s cuts are relatively modest

Allister Heath
IT is time for a reality check. The public spending cuts planned by the coalition only involve reversing, over five years, a small part of the enormous increase in expenditure which took place under Gordon Brown. This is highlighted again this morning by Tim Morgan of Tullett Prebon in A Shower, not a Hurricane: the Modest Nature of the Proposed Cuts, published by the Centre for Policy Studies.

In 1999-2000, government spending was £343bn. Had this merely moved in line with inflation, total expenditure would have reached £450bn in cash terms by 2009-10. Yet actual spending in that year had jumped to £669bn, an entirely unaffordable 53 per cent increase in real terms. The spending plans outlined in George Osborne’s emergency budget reduce real terms outlays from £697bn this year to £671bn in 2015-16. Remarkably, spending in real terms then will still be much higher than it was in 2008-09.

The numbers are telling. Total expenditure in nominal terms in 2008-09 was £630bn, £669bn in 2009-2010, going up to £697bn this year, £700bn in 2011-12, £711bn in 2012-13, £722bn in 2013-14, £737bn in 2014-15 and £757bn in 2015-16. In every single year, spending goes up in cash terms. It is only when one adjusts for inflation that the cuts become apparent, though they are not that great overall. Taking 2010-11 prices as the base, real spending was around £656bn in 2008-09, £682bn last year, going up to £697bn this year. It then falls to £687bn next year – in other words, real spending drops £10bn between this year and next. Total spending then dips another £5bn in real terms to £682bn in 2012-13, £675bn in 2013-14 and then £671bn in 2014-15, where it also remains in 2015-16.

There are three reasons why the cuts will feel harsher than that: interest payments are surging, squeezing the rest; entitlements (such as pensions) are rising, taking away resources from discretionary, departmental spending such as defence; and the political decision to protect the health and foreign aid budgets will squeeze other departments. Total unprotected spending will fall only seven per cent in real terms – from £523bn this year (down £1bn from last year) to £485bn by 2015-16 – but that total includes interest and entitlements.

One way forward to further improve the public finances would be for the coalition to increase the scale, scope and speed of its asset sell-off programme. The Adam Smith Institute estimates the coalition could raise £90bn over the next few years. Once market conditions become favourable, stakes in Lloyds and RBS should be sold. The Royal Mail – as already announced – and eleven other services, including the Met Office, the student loan book and the Royal Mint should also be privatised. Shares in a restructured Network Rail should be sold in tranches (raising £12bn), as well as the government’s 49 per cent stake in the National Air Traffic Services (Nats). The Institute proposes further privatisations in utilities, telecoms, leisure, investment trusts, defence and real estate, as well as of Channel 4 and BBC Worldwide.

Many benefits would accrue, particularly in terms of efficiencies. In some cases, primary legislation would be needed. But anything that helps the public finances, especially given the squeals of pain from the coalition’s comparatively modest cuts, must be pursued. There ought to be only one imperative ahead of Wednesday’s comprehensive spending review: no more tax hikes. allister.heath@cityam.com