What should Cameron cut?
8 May 2009
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Government and Institutions
5 May 2009
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11 May 2009
Tax and Fiscal Policy
19 November 2024
The projections in last month’s Budget were terrifying. They suggest that net government borrowing is likely to reach unprecedented levels over the next three years:
● 2009-10: £168 bn = 12.4% GDP
● 2010-11: £173 bn = 11.9% GDP
● 2011-12: £149 bn = 9.1% GDP
But even these forecasts may be too optimistic. They are based on GDP growth of -3.75% in 2009, +1% in 2010, and +3.25% in 2011.
But if the recession is deeper and longer than expected – say growth of -4.5% in 2009, -1% in 2010 and zero in 2011 – the deficit is likely to be closer to £200 billion for each of the next three years, equivalent to about 15% of GDP. Even when the recession ends, though, the structural budget deficit is still at alarming levels.
This would mean almost one in three pounds spent by the government would be borrowed.
Clearly such high deficits are unsustainable and need to be addressed urgently if a funding crisis is to be avoided. Yet raising taxes above already historically high levels is likely to be counterproductive. It will yield little extra revenue in the medium term. A substantial cut in public spending will therefore be the only serious option available to the next government.
If the Conservatives win the next election, David Cameron will be forced to deal with this problem. And tackling the low-hanging fruit – cancelling ID cards, NHS computer schemes and Crossrail, for example – while worthwhile, will not be adequate when around £150 billion of annual spending reductions may be required.
It will be necessary to curtail the major areas of government spending: welfare, health and education. Indeed, emergency cuts, or at least freezes, in welfare benefits and public sector pay may be in order – the kind of measures seen recently in struggling central European countries. Indeed, we should start this year – welfare benefits, pensions and public sector pay should not rise by more than private sector pay rises. If public sector pay cannot be reined in this year it will never be reined in. If welfare benefits are not pegged to wage increases then employment incentives will be diminished.
However, the crisis also presents opportunities for Cameron to launch positive longer-term reforms that reduce the scope of government. He could start by tackling public sector pensions (a liability of over £1 trillion), move on to welfare reform and then health and education, promoting competition and efficiency through individual savings accounts and voucher-type schemes while getting rid of the costly bureaucrats.
How could this be done in practice? A voucher scheme could involve a voucher of a fixed money value being given for the first five years of the scheme. Its value in real terms – and certainly relative to national income – would then fall. This could be politically acceptable as it would happen at the same time as huge efficiency savings were achieved.
And let’s not forget regulation. Removing red tape – for example, the new gender pay audits – would reduce the government payroll while lowering costs for businesses.
● 2009-10: £168 bn = 12.4% GDP
● 2010-11: £173 bn = 11.9% GDP
● 2011-12: £149 bn = 9.1% GDP
But even these forecasts may be too optimistic. They are based on GDP growth of -3.75% in 2009, +1% in 2010, and +3.25% in 2011.
But if the recession is deeper and longer than expected – say growth of -4.5% in 2009, -1% in 2010 and zero in 2011 – the deficit is likely to be closer to £200 billion for each of the next three years, equivalent to about 15% of GDP. Even when the recession ends, though, the structural budget deficit is still at alarming levels.
This would mean almost one in three pounds spent by the government would be borrowed.
Clearly such high deficits are unsustainable and need to be addressed urgently if a funding crisis is to be avoided. Yet raising taxes above already historically high levels is likely to be counterproductive. It will yield little extra revenue in the medium term. A substantial cut in public spending will therefore be the only serious option available to the next government.
If the Conservatives win the next election, David Cameron will be forced to deal with this problem. And tackling the low-hanging fruit – cancelling ID cards, NHS computer schemes and Crossrail, for example – while worthwhile, will not be adequate when around £150 billion of annual spending reductions may be required.
It will be necessary to curtail the major areas of government spending: welfare, health and education. Indeed, emergency cuts, or at least freezes, in welfare benefits and public sector pay may be in order – the kind of measures seen recently in struggling central European countries. Indeed, we should start this year – welfare benefits, pensions and public sector pay should not rise by more than private sector pay rises. If public sector pay cannot be reined in this year it will never be reined in. If welfare benefits are not pegged to wage increases then employment incentives will be diminished.
However, the crisis also presents opportunities for Cameron to launch positive longer-term reforms that reduce the scope of government. He could start by tackling public sector pensions (a liability of over £1 trillion), move on to welfare reform and then health and education, promoting competition and efficiency through individual savings accounts and voucher-type schemes while getting rid of the costly bureaucrats.
How could this be done in practice? A voucher scheme could involve a voucher of a fixed money value being given for the first five years of the scheme. Its value in real terms – and certainly relative to national income – would then fall. This could be politically acceptable as it would happen at the same time as huge efficiency savings were achieved.
And let’s not forget regulation. Removing red tape – for example, the new gender pay audits – would reduce the government payroll while lowering costs for businesses.
22 thoughts on “What should Cameron cut?”
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Richard’s points are well made, but the key issue at present is not one of detail but of changing perceptions. Just like Blair was able to alter perceptions about the NHS after 1997, the job of the Conservatives now is to make it absolutely clear that the public sector is simply unaffordable and that major changes are unavoidable. Sacred cows like health spending have to be killed. Once this is done then they get down to the detail.
Richard’s points are well made, but the key issue at present is not one of detail but of changing perceptions. Just like Blair was able to alter perceptions about the NHS after 1997, the job of the Conservatives now is to make it absolutely clear that the public sector is simply unaffordable and that major changes are unavoidable. Sacred cows like health spending have to be killed. Once this is done then they get down to the detail.
This looks like Labour propaganda to me, there are three million superfluous taxpayer funded jobs (plus office space, stationery, pensions etc), that’s £100 billion saved just like that.
NB – number of taxpayer-funded jobs up from 6 million in 1997 to about 8 million now, out of those 8 million, less than 2 million are teachers, nurses, doctors, coppers, prison officers, armed forces etc.
So no need to reduce welfare spending and all the stuff that Labour say will be cut.
PS, Crossrail is a good idea – it’s just that it ought to be funded by a surcharge on Business Rates and Council Tax in the areas that will benefit.
This looks like Labour propaganda to me, there are three million superfluous taxpayer funded jobs (plus office space, stationery, pensions etc), that’s £100 billion saved just like that.
NB – number of taxpayer-funded jobs up from 6 million in 1997 to about 8 million now, out of those 8 million, less than 2 million are teachers, nurses, doctors, coppers, prison officers, armed forces etc.
So no need to reduce welfare spending and all the stuff that Labour say will be cut.
PS, Crossrail is a good idea – it’s just that it ought to be funded by a surcharge on Business Rates and Council Tax in the areas that will benefit.
Whilst I agree with you on the need to cut expenditure, I think you have misunderestimated the “low hanging fruit” if you are really radical. Do we really need public funding for adult education, the olympics, the royal opera house? We could probably make do with 10% of our military expenditure if we stopped foreign adventures. We could get rid of much crime and hence policing, prison, legal costs with sensible laws on drugs, alcohol and immigration. Privatising roads and traffic policing would reduce these to zero. And a massive simplification of tax and regulation would increase government revenue and reduce cost and the need for civil servants and courts, plus making us much more efficient
Whilst I agree with you on the need to cut expenditure, I think you have misunderestimated the “low hanging fruit” if you are really radical. Do we really need public funding for adult education, the olympics, the royal opera house? We could probably make do with 10% of our military expenditure if we stopped foreign adventures. We could get rid of much crime and hence policing, prison, legal costs with sensible laws on drugs, alcohol and immigration. Privatising roads and traffic policing would reduce these to zero. And a massive simplification of tax and regulation would increase government revenue and reduce cost and the need for civil servants and courts, plus making us much more efficient
Clearly there is enormous scope for very substantial cuts given the rapid growth of the state in the last decade, and as Peter points out the Conservatives now need to work on laying the groundwork in terms of changing public perceptions. My fear is that a new administration will face very powerful vested interests when it tries to slim down the public sector. While Margaret Thatcher managed to tame the trade unions, even she failed to tackle the health and education establishments.
Clearly there is enormous scope for very substantial cuts given the rapid growth of the state in the last decade, and as Peter points out the Conservatives now need to work on laying the groundwork in terms of changing public perceptions. My fear is that a new administration will face very powerful vested interests when it tries to slim down the public sector. While Margaret Thatcher managed to tame the trade unions, even she failed to tackle the health and education establishments.
Richard, you’re quite right about Mrs Thatcher and that is why the issue is one of political perceptions. Of course, there are massive cuts to be made, but parties need to get and stay elected. Remember Nigel Lawson’s response when asked why they could have full blown monetarism in Chile and not in the UK: ‘We don’t have water cannon’.
Richard, you’re quite right about Mrs Thatcher and that is why the issue is one of political perceptions. Of course, there are massive cuts to be made, but parties need to get and stay elected. Remember Nigel Lawson’s response when asked why they could have full blown monetarism in Chile and not in the UK: ‘We don’t have water cannon’.
One of the problem of low hanging fruit (Mark and Nick) is that whilst it hangs low it is stuck to the tree with superglue. Thus any process of cutting spending must involve cutting programmes – otherwise we are relying on bureaucrats to cut their own budgets and we know what happens then. We also MUST cut welfare spending: it helps neither recipients or taxpayers. Of course there is the question of what to cut, what systems to redesign and so on but there must be cuts.
One of the problem of low hanging fruit (Mark and Nick) is that whilst it hangs low it is stuck to the tree with superglue. Thus any process of cutting spending must involve cutting programmes – otherwise we are relying on bureaucrats to cut their own budgets and we know what happens then. We also MUST cut welfare spending: it helps neither recipients or taxpayers. Of course there is the question of what to cut, what systems to redesign and so on but there must be cuts.
Nice article. Yes, spending freezes are really just short-term emergency measures. The right thing to do is not to leave everything in the hands of government and cut spending on each item a little, but to remove some tasks from the government altogether. Just like Cuba won’t solve its problems by cutting the bread ration, but only by privatising bread production and allowing free prices and market entry.
Nice article. Yes, spending freezes are really just short-term emergency measures. The right thing to do is not to leave everything in the hands of government and cut spending on each item a little, but to remove some tasks from the government altogether. Just like Cuba won’t solve its problems by cutting the bread ration, but only by privatising bread production and allowing free prices and market entry.
We also MUST cut welfare spending:
The real corrosive impact of welfare spending is because it encourages idleness. Partly because basic benefits are too generous, perhaps, but mainly because of the degree of income based means testing – most benefit or Tax Credit claimants face marginal tax rates of 70% to 100% on earned income. Reduce the degree of means testing and hey presto, the amount of welfare paid out will not rise, it will fall, because more people will be in work.
Or is that what you meant?
We also MUST cut welfare spending:
The real corrosive impact of welfare spending is because it encourages idleness. Partly because basic benefits are too generous, perhaps, but mainly because of the degree of income based means testing – most benefit or Tax Credit claimants face marginal tax rates of 70% to 100% on earned income. Reduce the degree of means testing and hey presto, the amount of welfare paid out will not rise, it will fall, because more people will be in work.
Or is that what you meant?
More or less, Mark. I meant that we must cut it not just to reduce government borrowing but because it is wrong of itself. Reducing the extent of means testing is one way of doing it, certainly.
More or less, Mark. I meant that we must cut it not just to reduce government borrowing but because it is wrong of itself. Reducing the extent of means testing is one way of doing it, certainly.
“welfare benefits, pensions and public sector pay should not rise by more than private sector pay rises”
I always knew you were a closet pinko, Richard! )
Benefits, pensions and public sector pay should be reduced in line with public expenditure, which at the very least should shrink in line with the economy. Otherwise we have a kind of recession-driven fiscal-drag where government becomes bigger simply because it is not allowed to shrink as the economy shrinks.
“…a voucher of a fixed money value being given for the first five years of the scheme. Its value in real terms… would then fall.” Not if we experience deflation!
I think we need far more radical thinking than this.
“welfare benefits, pensions and public sector pay should not rise by more than private sector pay rises”
I always knew you were a closet pinko, Richard! )
Benefits, pensions and public sector pay should be reduced in line with public expenditure, which at the very least should shrink in line with the economy. Otherwise we have a kind of recession-driven fiscal-drag where government becomes bigger simply because it is not allowed to shrink as the economy shrinks.
“…a voucher of a fixed money value being given for the first five years of the scheme. Its value in real terms… would then fall.” Not if we experience deflation!
I think we need far more radical thinking than this.
Tom – I agree with you, of course. The idea of this post was to make some suggestions that would be politically realisable after the next election rather than set out my personal policy preferences.
Increasingly, given the deteriorating state of the public finances, it looks like emergency spending cuts will be necessary. Cameron may well have to cut welfare benefits, public sector pay, education and maybe even health. Let’s hope he has the courage to take the necessary steps and uses the opportunity to make structural changes to reduce the size and scope of the state.
Tom – I agree with you, of course. The idea of this post was to make some suggestions that would be politically realisable after the next election rather than set out my personal policy preferences.
Increasingly, given the deteriorating state of the public finances, it looks like emergency spending cuts will be necessary. Cameron may well have to cut welfare benefits, public sector pay, education and maybe even health. Let’s hope he has the courage to take the necessary steps and uses the opportunity to make structural changes to reduce the size and scope of the state.