Sunday, April 17, 2005
Parties play the fantasy savings game
Posted by David Smith at 11:01 AM
Category: David Smith's other articles

The most confusing election debate over tax and spending for years boils down to three simple questions:

Can the efficiency savings all three main parties are relying on through cutting government waste be achieved?

Can Labour meet its promises for public services, and stick to Gordon Brown’s fiscal rules, without raising taxes substantially?

And can the Conservatives simultaneously cut taxes by £4 billion while reducing government borrowing by £8 billion and spending at least as much as Labour on “priority” public services?

Cutting waste

Efficiency savings are this election’s hot fashion item. Two years ago Brown commissioned Sir Peter Gershon, former managing director of Marconi, to investigate the scope for cutting waste in government.

Gershon’s report last summer said up to £21.5 billion could be saved by 2007-8 through a long and detailed series of civil service cuts, reorganisations and efficiencies. As importantly, he said such savings were at the limit of what could be achieved without damaging services.

For the Tories, however, £21.5 billion was not enough. Their efficiency watchdog, David James, identified

£35 billion of savings. Much of this overlapped the Gershon savings, but the Tories announced much deeper cuts in civil service jobs — 235,000 compared with the government’s 84,000 — and specific reductions in government activity.

Most of Labour’s New Deal and the Small Business Service would be scrapped; the Office of the Deputy Prime Minister, John Prescott’s empire, would be reduced to a stripped-down local government department; and the government’s budgets for advertising and management consultants would be slashed.

In all, said the Tories, 72% of their additional £13.5 billion of savings would come from reducing activity.

The Lib Dems have added £5.7 billion to the £21.5 billion of savings identified by Gershon, by abolishing the Department of Trade and Industry, for example, and pulling out of the Eurofighter project.

According to Professor Colin Talbot, director of the Policy Centre at Nottingham University, all three parties are playing “fantasy efficiency savings”. He says only a small part of the supposed Gershon savings will come from job cuts, the record of government in achieving any savings through integrating so-called back office functions is poor, and the idea that there are huge savings to be made from more efficient purchasing is unrealistic.

Talbot is also critical of the Gershon review’s claim that more than £8 billion can be achieved through “non-cash” savings — boosting public sector productivity.
This presents a problem, too, for the Tories and Lib Dems, although Talbot says £12 billion of the £35 billion of Tory savings probably can be achieved because they involve axeing specific government functions, not merely carrying them out more efficiently.

Labour has said it will plough its £21.5 billion back into frontline public services, so a failure to achieve that figure means services will suffer. The same is true for the other parties.

Will taxes rise if Labour is re-elected?

Unlike in 2001, Brown’s aides insist there is no strategy to raise National Insurance (NI) contributions. Plan or no plan, outside economists say taxes will need to rise.

A substantial rise in taxes is already built into the Treasury’s plans. By 2007-8, it says, the tax burden will be nearly 3% of gross domestic product higher than in 2003-4. That is equivalent to £35 billion at today’s prices. The assumption is that this can be achieved by “fiscal drag” — pushing people into higher tax and NI brackets — and a clampdown on tax avoidance.

Outside economists think that will not be enough. The International Monetary Fund has said there will need to be new taxes of £12 billion a year to meet the chancellor’s rules. The Institute for Fiscal Studies (IFS) and other bodies take a similar view.

The Lib Dems are the only party to promise an explicit tax rise, a new 50% rate for those earning over £100,000, raising £5.5 billion a year by 2007-8. The party’s planned switch from council tax to a local income tax is a new tax cut, of £2.4 billion. But a quarter of households, those with incomes above £38,000 a year, would face higher bills.

Having allocated most of their 50% tax hike to free personal care for the elderly, local taxes and abolishing university tuition fees, they would face pressure similar to Labour for other tax hikes.

Can the Tories cut taxes and borrowing while boosting spending on key services?

The independent IFS says yes. An £8 billion cut in public borrowing, combined with Tory plans to increase spending at a slower rate than Labour, would head off Labour’s third-term tax increases. A £4 billion cut in taxes (just over a penny off the basic rate of income tax) would also be affordable, but no more.

There is, however, an important caveat. The Conservatives, like Labour, are relying mainly on cuts in waste and only partly on reducing government programmes. If those efficiency savings are unachievable, as the experts say, the Tories would face the choice between tax cuts and squeezing frontline public services — the same problem that every government has had to confront, sooner or later, in the past.

From The Sunday Times, April 17 2005