Doubts over Brown plan for £20bn in cutbacks

Failure to hit target for public sector savings will mean tax rises, say City economists
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The Independent Online

Doubts were growing yesterday over the Government's pledge to cut £20bn a year of spending to fund investment in front-line services - a central plank of Wednesday's Budget.

Doubts were growing yesterday over the Government's pledge to cut £20bn a year of spending to fund investment in front-line services - a central plank of Wednesday's Budget.

Experts said it was impossible to say whether the Chancellor would hit his targets and warned he now had so little room for manoeuvre that failure meant taxes would rise after the next election.

Meanwhile there was a fresh row over the "golden rule" that says the Government must balance the public finances, as leading City economists said the Chancellor had already broken the rule - despite Mr Brown's claims to the contrary.

In the Budget Mr Brown unveiled plans to cut costs of Whitehall administration by 2.5 per cent a year between 2005 and 2008, including cutting 40,500 jobs from the Department of Work and Pensions and a newly merged Inland Revenue and Customs & Excise.

As the dust settled after Wednesday's keynote event, economists and management experts warned that previous governments had tried - and failed - to breathe private sector discipline into the corridors of Whitehall.

"Efficiency improvements are all well and good to talk about, but delivering them is another matter," said Nick Stamenkovic, at RIA, an Edinburgh bond broker. "These are hefty savings that must be subject to uncertainty."

The Institute for Fiscal Studies, an independent think-tank, said the Government was looking to achieve even higher productivity from civil servants than the 2.25 per cent it has factored in for the economy as a whole.

"It is hard to predict whether this is do-able on the grounds that it is hard to measure what is going on with public sector productivity," said Robert Chote, director of the IFS.

The Chartered Institute of Personnel and Development warned Mr Brown not to embark on a "crude war on waste", pointing out that major cost cutting programmes carried potential risks.

John Philpott, its chief economist, said: "Losing 45,000 civil service jobs will take considerable human resources effort, given the necessary redundancies involved and the need to retrain redundant workers.

"If the process is not handled carefully, the war on waste could prove more difficult to pursue than the Chancellor and his waste warriors advise."

The IFS warned that failure to hit the targets could eat into the cash being directed to delivering improvements in schools, hospitals, train stations and crime-torn streets.

"The Government is essentially saying that below these efficiency savings they want to keep the amount of money going into front-line services growing at the same rate as in the last spending review despite the fact that the total is slowing down," Mr Chote said.

The Budget showed real spending growth, excluding inflation, in 2006-2008 would be 2.5 per cent compared with 5 per cent under the 2002 spending review. "The aspiration here is that the Government continues to deliver improvements in public services by increasing at less cost than in the past," Mr Emmerson added.

The picture is further complicated by the fact that there might be short-term costs with any redundancies and associated with the separate plan to move 20,000 jobs out of London and the South East.

The Government has said it can achieve the job cuts by "natural wastage" - freezing posts as people retire or quit - but the unions have made clear that any compulsory job losses will meet fierce resistance.

Economists said doubts over the efficiency targets simply added to concerns about the assumptions underpinning the Chancellor's optimistic forecasts that he can bring deficits under control by 2008.

Mr Philpott said the Chancellor was heavily reliant on the savings "without which his predictions for borrowing in the next economic cycle will start to look dodgy".

The Budget forecast the deficit falling from £37bn to £23bn in 2008 as tax revenues rebounded on the back of a surge in receipts from City-related areas such as bonus payments, financial company profits and mergers and acquisitions.

Michael Saunders, a UK economist at Citigroup, said the Treasury was expecting revenues to grow almost 8 per cent a year in 2004 and 2005.

"Even at the end of the 1990s boom, when soaring equity markets created unusual strength in revenues, revenue growth in 1999 and 2000 and was 6.7 per cent." he said.

The IFS agreed, saying that as receipts fell short, the Treasury would be forced to impose a tax hike of £13bn a year - equivalent to 4p on the basic rate of income tax. PricewaterhouseCoopers, the accountancy firm, said the "black hole" was £10bn.

At the heart of the debate is the golden rule, which dictates the Government must borrow only to invest over an economic cycle, meaning borrowing to pay for other spending must be covered by surpluses in other years. The Chancellor said he would pass the test by £11bn. However, the IFS said this compared with the £124bn it forecast in 2001 and an average two-year forecasting error of £19bn.

It repeated its complaint that by adding together the cash surpluses and deficits - rather than working it out as a percentage of GDP - Mr Brown breaks the rule by £1.1bn.

Whereas in the past this had been an arcane argument between the Treasury and the think-tanks, the big investment banks are joining in. Deutsche Bank said the golden rule was met on only one of three possible yardsticks, all of which the Chancellor had used in the past.

Barclays Capital agreed with a £1.1bn shortfall. "We are supposed to be aiming for clear and transparent reporting on the numbers," said David Hillier, the chief UK economist at Barclays Capital. "This is not, in our view, what has been delivered this time around."

The Chancellor brushed aside the claims, telling Sky News: "The Budget I produced was the proper balance. There was no need to raise taxes. I could have cut taxes."

There was some good news yesterday for the Chancellor - at least in terms of preserving his reputation as an Old Labour redistributive Chancellor. IFS analysis showed the major gainers in the new tax year would be those in the poorest tenth of society - specifically pensioners and families with children.