Sean O'Grady: Where will the pain be felt? Nobody wants to say

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The Independent Online

Though the angry political exchanges may disguise it, the Government is already embarked on one of the tightest fiscal squeezes among the advanced economies, or in British history. The spending cuts planned by the Chancellor will, in some departments, be deep. From £676bn this year, total public spending could fall to nearer to £600bn a year by 2014 – with unavoidable job cuts, pay freezes and deteriorating services.

Analysis by the Institute for Fiscal Studies has revealed that, assuming Labour keeps its promise to protect "frontline services", the pain in other departments will be intense – a massive £37.2bn a year in cuts by 2014. Where? Alistair Darling has announced that around £5bn will be saved by capping public pay and trimming pensions; another £11bn will derive from "efficiency savings"; £5bn will come from cuts to "low priority" programmes; leaving a bulky £17bn or so to be found in as yet unspecified economies.

On the cuts so far revealed, while few will mourn the £650m taken out of spending on management consultancy, the £550m that will be extracted from local government means poorer services and more sackings: The Independent's recent survey of councils revealed that 20,000 town hall jobs have gone so far.

Cuts to "lower priority programmes" could also be controversial: care for the elderly (£500m); higher education (£600m); adult skills (£300m); prisons and courts (£360m); the NHS IT scheme (£500m) and even £13m in diplomatic staff perks. The IFS also predicts that housing and transport will see disproportionately larger cuts during the next parliament, as they are the most capital-intensive areas of government activity, and the Treasury has admitted that infrastructure programmes are due to be reduced by more than current spending on items such as wages. So expect more congestion on the roads.

Where the balance of £17bn or so in unspecified cuts – the equivalent of half the schools budget – will eventually be found is unknown. Lord Mandelson seems keen on reducing student courses to two years. Defence could suffer from any new review of the UK's world role.

Yet for many – the Bank of England, the credit ratings agencies, the IMF and now the European Commission – even current government plans are not ambitious enough. If a further £20bn in cuts has to be found, as the Commission suggests, cherished programmes such as the Trident replacement, may also fall into jeopardy.

For now, "frontline" services in three areas are ringfenced – schools (with a small real-terms improvement), the NHS and policing (both frozen).

However even these categories are only guaranteed immunity for two years and the pressure to trim them may become irresistible. Only the commitment to push overseas aid to the UN target of 0.7 per cent of national income by 2013 seems sacrosanct.

More could be done on tax. This year has seen the rise in VAT back to 17.5 per cent, the end of the stamp duty holiday, and the special tax on bankers' bonuses (which has yielded £2bn more than ministers thought).

When the new tax year begins on 6 April, the new 50p rate on earnings of more than £150,000 will come into force. But most observers believe the scope for many more tax rises is limited – with the exception of VAT.

Within 18 months a new government may have to pre-announce a rise in VAT to 20 per cent; though that will depress demand. The question is, will curing the public finances yet kill the economy?

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