Andrew Lilico

The day of reckoning draws near

The day of reckoning draws near
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Tomorrow we finally move from generalities to specifics.  No need to argue any more about whether the losers will be up in arms or will it all be a damp squib.  Tomorrow we get the gory detail.

At the time of the Emergency Budget we were told to expect cuts in non-ring-fenced departments of 25 percent.  Then we heard that departments had been asked to provide scenarios for 25 percent and 40 percent cuts.  That was always going to be necessary because Defence and Education (the two largest departments apart from the ring-fenced Health) weren’t ever going to be cut by that much.  After today’s Strategic Defence and Security Review, we now know that Defence is being cut by 8 percent (through measures such as delaying Trident and not equipping the new aircraft carriers with planes). And education will perhaps be cut by 10 percent.  That means cuts of more than 35 percent elsewhere.

Achieving cuts that large will mean pruning back right to the base those departments, such as BIS, CLG, and DECC, where there is considerable discretionary spending. Plausible cuts are likely to involve budgets for after-school and breakfast clubs, science research, the Olympics, Higher Education teaching, the Technology Strategy Board, and the policing budget.  There may also be unpalatable cuts — such as cutting the local government grant by a quarter to a third; the prisons budget by a blunt 20 percent; and policing budgets by as much as 20 percent.

Some additional cuts to welfare budgets have been announced, but at present it is expected that these merely compensate for the extra cost in early years of Iain Duncan Smith’s welfare reforms.  Could the government yet finally bite the bullet and cut the ill-directed winter fuel payments despite Cameron’s denials last week?  Might Child Benefit be cut for over-16s?

All told, we will see around £80bn in spending cuts, and over £20bn of tax rises, reducing the underlying structural deficit (the bit that won’t go away when the economy recovers) by over £100bn.  Spending is scheduled to drop from about 48 percent of GDP in 2010/11 to about 40 percent in 2015/6, undoing the huge spike Brown created from 2007/8 to 2009/10 but not reversing the effects of the rises from 1999/2000 to 2005/6.

In the areas of spending affected, this will force a revolutionary re-think about the role of the state.  Now, if we could just get them to think again about that NHS ringfence…

Andrew Lilico is the Chief Economist of Policy Exchange, and lead author of Policy Exchange’s latest paper: “How to cut 25%