Back to black

Britain has got used to living beyond its means – an unsustainable position. The future health of the economy and public services will depend on the country moving “back to black”. The Government has acknowledged that it cannot continue on the “never never”. However, it has now embarked on the doomed course of raising taxes (a new income tax rate at 45p and a levy on National Insurance Contributions from April 2011) in the teeth of a recession. This is the wrong approach.

Focussing on tax fails to address the major cause of the fiscal crisis – namely excessive public expenditure. It would leave public spending at historically high levels during the recession, crowding out private sector investment in the recovery. Tax rises will choke off recovery and dampen long term growth prospects by making Britain less competitive and putting people off work. A long period of stagnation is the likely outcome.

Instead, the Government needs to deal with the state’s excessive size. A new culture is needed where civil servants and ministers take the same care of public money as they do their own. This has been successfully adopted in London, where expenditure of over £1,000 is published on the web and the precept for London taxpayers has been frozen. There should be much greater transparency, with all expenditure published and procurement conducted on a truly open basis, for example in defence.

However, a new spending culture is not enough. The wings of government need to be clipped to make sure what is done is done well. Extra spending on services over the last ten years has led to confusion and duplication. It has distracted public services from their core purposes. The education department has failed to improve standards whilst trying to “ensure economic growth”, take over child protection and interfere in family life. The health service has experienced a “flash flood” of cash leading to inflated salaries and constricting bureaucracy. Extra spending on welfare has increased benefit payments to the well-off and entrenched a culture of worklessness and low aspiration.

The crisis in the public finances should be the catalyst for a reform programme that is years overdue. While savings should be achieved by eliminating administrative waste and (for example) freezing civil service pay, that is not enough. The UK has nurtured a triffid of public spending that cannot be controlled just by lopping off a few outer leaves.

The Chancellor should announce a five year recovery plan that reforms and reduces the “big spenders” of government – health, defence, benefits, education and communities. This would mean encouraging early savings in 2009-10 and reducing public spending by at least £30 billion (4 per cent) in 2010-11 to kickstart reform. A strong reform programme will see public spending fall steadily in 2011-12, 2012-13 and 2013-14. Reform has set out the details of such a programme in recent publications.

The main proposals to reduce spending in 2010-11 are:

Abolish universal Child Benefit. Instead Child Benefit should be targeted on families on low incomes. Saving: £7.1 billion (after making allowance for additional expenditure of £5 billion on the poorest families).

Reduce the pay of doctors and NHS managers by 10 per cent. NHS pay rocketed in the middle years of this decade, far above the average rate of pay growth in the economy. NHS pay rises are already falling as the service returns to sanity, but not yet far enough. Saving: £1.3 billion.

End inappropriate defence projects. Several projects (the future carriers, Eurofighter Tranche 3, A400M and Nimrod MRA4) do not contribute to the UK’s modern defence requirements. Saving: £2.7 billion.

Remove pensioner gimmicks, such as the winter fuel payment and free TV licences for over-75s. Saving: £3.2 billion.

Introduce market rates for interest on student loans. Saving: £1.2 billion.