ECONOMISTS yesterday welcomed Tory plans to cut public spending by £23bn over the next parliament, but warned that the party would need to make much deeper cuts to plug the massive budget deficit.
Speaking at the Tory party conference in Manchester, shadow chancellor George Osborne set out plans to shave £7bn a year from existing spending commitments. He proposed:
• A pay freeze for over 4m public sector workers in 2011-2012, which the Tories say will save £3.2bn assuming that wages would have increased by 2.4 per cent. Those earning less than £18,000 a year will be exempt, as will armed forces serving overseas.
• Saving £3bn a year over the course of the next parliament by cutting the cost of Whitehall bureaucracy.
• Stopping tax credits for those on incomes over £50,000, a move that Osborne said would save £400m a year or £2bn over the entire parliament.
• Cutting benefits by £25-a-week for anyone on incapacity benefit who is deemed fit-to-work in a new medical test, saving £1bn over five years, although £600,000 of this will be spent on new back-to-work schemes.
• Saving £1.5bn in the next parliament by not contributing to the Child Trust Funds of better-off families.
• Raising the retirement age from 65 to 66 from 2016 for men and 2020 for women, which the Tories said would save £13bn a year once implemented.
Osborne also mentioned the possibility of reversing Gordon Brown’s tax on pension funds, although this would be an expensive move, costing well in excess of £5bn a year.
But he said that the 50p tax rate would stay in force for the time being. “We could not even think of abolishing the 50p rate on the rich… while asking many of our public sector workers to accept a pay freeze.”
And he hinted that a Tory government could introduce a windfall tax on bonuses if banks increase remuneration instead of using profits to increase their capital levels.
Gemma Tetlow, senior research economist at the Institute of Fiscal Studies, welcomed the plans to cut spending but said Osborne would need to be more radical.
She added: “The savings are not sufficient on their own to bring the reduction in borrowing that the Conservatives have signed up to.”
She also said Osborne was being over-optimistic in saying he could save £13bn by raising the retirement age.
And Jonathan Loynes of Capital Economics said: “This is small fry compared to the government’s forecast that borrowing will still be close to £100bn per annum at the end of the next parliament.
“Much deeper spending cuts, probably involving huge cuts in public sector employment, will be needed.
“Markets, credit rating agencies and investors will be looking to see borrowing come down more quickly.”