Three ways to ease squeeze on spending

This comment piece was first published by the Daily Mail and has been reproduced here with permission.

The prime minister has promised £7 billion worth of tax cuts in the next parliament. The opposition have promised additional spending on the NHS and a new 10p rate of income tax. Everyone seems to want to spend more money on childcare. None of the main UK parties are talking about large tax rises or specific measures that would bring about deep spending cuts.

Are these promises they can keep?

If they are it’s only because there is a conspiracy of silence about details of spending cuts, and perhaps tax increases, which would be needed elsewhere. For despite appearances neither the economy nor the public finances are anywhere near back to normal.

In terms of the public finances George Osborne has done barely half of the consolidation he intends. The deficit this year will still be close to £100 billion. Don’t be fooled by some of the statistics being thrown about. If Mr Osborne’s ambition to eliminate the deficit entirely without further tax rises is to be achieved then we should expect the next parliament to contain a repeat of the spending cuts we have seen over this one. Inevitably (assuming the easy things were done first) further cuts would be harder to achieve and their effects would be felt more keenly.

It is hard to overestimate the scale of change in public services that this implies. By 2018-19, on current government plans, we will be spending one third less on average across a range of public services – transport, local government, justice, police, environment – than we were in 2010.

It is important to understand that this will not mean that overall size of the state, the overall total of tax and public spending, will be particularly low. The problem is that we are spending more on some areas like debt interest, pensions, and are not cutting the biggest programmes of them all – health and schools. That means what remains is feeling the squeeze very sharply indeed.

There are only three ways out of this huge squeeze.

One is to squeeze elsewhere - cut spending on health, pensions, or other social security, say. Given the pressures on the health service the NHS might in fact require a rise in its budget. Cuts look really hard. Cuts to pensions are politically difficult. Where cuts have been proposed, such as the Labour Party’s commitment to cutting winter fuel allowance for higher rate taxpayers, they are so small that the sums saved would be almost lost in the Treasury’s roundings. It is a measure of the feebleness of the debate that this can be presented as a serious contribution to deficit reduction.

The Conservatives have promised further cuts to working age social security, without providing details of what most of those cuts would look like. As we illustrate in work to be published today spending can still march on upwards even as the generosity of benefits is cut. Spending on housing benefits and disability benefits is higher now than in 2010 despite announced cuts, and less has been saved on tax credits than hoped. Low wages, high rents, and difficulty in delivering change explain the gap.

The second option, of course, is to increase tax. Not easy politically. And the government’s forecasts already imply the tax burden rising to its highest level in 30 years by 2018–19.. Raising taxes further would be an admission that, in the face of the pressures created by an ageing population and a burgeoning debt interest bill, we just need to take more of people’s income in tax than we have been used to for a long time. Possible, but a big choice.

Finally, we could live with more debt. Both Labour and the Liberal Democrats have proposed less stringent fiscal targets than the Conservatives. In fact you could argue there is more fiscal blue water between the parties than there has been since at least 1992. But even their softer targets still require serious cuts. And of course more difficult decisions later.