Fraser Nelson

How the Tories will cut

How the Tories will cut
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How will the Tories cuts council work? The Guardian has an interesting piece today, laying out some contours (which will be not entirely unfamiliar to CoffeeHousers). But there is much more to the story – albeit a story which is still being moulded.

Much of Tory policy is being formed in response to what they regard as the structural failures of the Blair/Brown era.  George Osborne is keen to avoid what he regards as the dictatorial approach of Gordon Brown where ministers are handed their budgets and told to eat it. So he wants a more collegiate approach, and to this end has revived the idea of a ‘star chamber’ for spending – this idea was pioneered by the Thatcher government, chaired first of all by Keith Joseph and latterly by the Chancellor.

Here’s how it would work. The spending envelope would be set, in the Budget – but it won’t just be the Chancellor demanding cuts. The Office for Budget Responsibility would be up and running too. Very little attention is being given to the OBR, perhaps because it sounds like some spivvy quango which will be an irrelevance. But Americans perhaps thought that about the Congressional Budget Office before Nixon set it up in 1973 – it now has huge authority, and is a powerful check on the administration. If Britain had a CBO then Brown would not be able to lie through statistics so much. The Tories genuinely regard the OBR as a shift in power, removing the ability of the government to vandalise the public finances (and conceal debt) to the extent that Brown has done.

Crucially, the OBR would be responsible for telling the government when it needs to start repaying the debt. Mervyn King yesterday argued for prompter repayment—in the Tory era, we will have an OBR saying “quite right, and here is what we demand of the government.” It would be apolitical, and would not specify if these cuts were to come from extra tax or lower spending. It may (I hope) produce a model for dynamic tax forecasting – thus giving a realistic assessment of the options available to the Treasury. At present, HMT does “ready reckoners” which don’t account for the fact that higher taxes lower the incentive to work. The Treasury is programmed with false, zero- sum, high-tax logic. The OBR has the potential to take a real-world view of taxes – and hopefully a Tory Treasury will too.

Who would do the talking? Sir Alan Budd has been advising the Tories on the OBR, and I suspect that he may well end up chairing it (although other candidates are in the frame). So when the OBR speaks, the Chancellor will respond - in the Budget. That will set out a general spending envelope. Then, the Tories will start to work out who will eat the cuts.

The Tories would keep Brown’s idea of three-year spending reviews, updated every two years. John Major had annual negotiations, which were exhausting. (When Malcolm Rifkind came in as Scotland Secretary, Major asked him if he wanted to resign now or leave it to the end of the conversation). Having three-year spending reviews saves this annual agony, and gives a bit more visibility to departments allowing longer-term planning.

The Spending Review will, as now, be conducted through the Chief Secretary to the Treasury. This will be Philip Hammond, but he will be much more powerful than previous Chief Secs. He will be a kind of Deputy Chancellor, a status already reflected in the amount of media he is doing. Cameron is increasingly impressed with Hammond, especially his performances over the 10% cuts debacle. Improbable as it may seem, Hammond is set to be one of the most powerful figures of the first Tory government.

So Hammond will be sent to parlay with his cabinet colleagues about who would eat the most cuts. Osborne hopes that they won’t protest too much – this explains David Cameron’s remarks to the Tory spring conference where he said he wants ministers to be the government’s representatives in the department, not vice versa. It is human nature, of course, for ministers to get territorial almost immediately.

The spending Review process is usually studded with ministers planting stories about how their rivals waste money – another reason why Brown wanted to do this every two or three years. Osborne will take the final decisions, however – Hammond’s task will be day-to-day negotiating.

Tory ministers who agree their budgets can be cut would then, as a reward, be sent to the ‘star chamber’ where they will help adjudicate disputes between Hammond and the ministers who protest. Cameron and Osborne are determined to present an absolutely united front, so ministers don’t try to appeal straight to the PM (as some did under Lawson).  Unity between the PM and Chancellor is regarded by the Tories as key to the whole spending review process. And by the end of it, we have a Tory spending review for a three-year period.

The Tories are expecting Brown to publish a spending review for the three-years ending April 2014, and to release it in March. So the Tory Spending Review will probably replace the one that Brown released – but had little intention of implementing. They will also try to reduce the 2010-11 spending rises by as much as they can – so we can expect a post-election Budget.

Finally, to stress: there has been no sign-off on this yet. But the above is, I understand, the latest thinking - and the end result won't differ too much from it.

Written byFraser Nelson

Fraser Nelson is the editor of The Spectator. He is also a columnist with The Daily Telegraph, a member of the advisory board of the Centre for Social Justice and the Centre for Policy Studies.

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