Coalition Budget: Thinking the unthinkable

John Rentoul, Jane Merrick, Brian Brady and David Randall evaluate ways of going even further than next week's Budget cuts

(GETTY IMAGES)

David Cameron spoke of changes to "our whole way of life" last week as he warned that his Government would have to take drastic measures to cut Britain's £156bn deficit.

Next week's Budget from Chancellor George Osborne is likely to contain some difficult decisions, but what if we went further, and really did "think the unthinkable" about cutting public spending?

What would it mean to slash spending by between £70bn and £110bn a year, which is what the new Office for Budget Responsibility will announce tomorrow is required to deal with the "structural" deficit – that is, the bit that won't go away even after the economy has recovered from the recession?

Obviously, no one is suggesting that the whole amount should be made up in one go in the next few years. And, is such drastic action needed? After all, six weeks ago during the election, Nick Clegg and Vince Cable – now in the coalition Cabinet – were arguing that dramatic cuts were not needed this year.

And Alistair Darling, the former chancellor, yesterday accused Mr Cameron of deliberately inflating the scale of Britain's problems to strip back the state.

But, to accept the coalition's logic, and just for the sake of working out what we really think about public spending, what would thinking the unthinkable involve?

Here, we come up with a shopping list of spending cuts and tax rises – over and above the £6.2bn of spending cuts already announced by ministers – that, although drastic, illustrate the extent of what Mr Cameron and Mr Osborne claim is needed.

1. Cut public sector pay and pensions

What it would mean: Cut gross annual pay for highest-paid 10 per cent by 10 per cent, and increase employee pension contributions by a quarter. The coalition has announced a one-year public sector pay freeze, but ministers could go further and implement permanent cuts to pay and pensions for state employees.

Unthinkability factor: 1

What it could save: £4.4bn a year

2. Abolish investment in new school building

What it would mean: The Taxpayers' Alliance and Institute of Directors argue for huge savings on new building, notably through the £50bn-plus Building Schools for the Future (BSF) programme, launched in 2003. "Fiscal pressures brought on by the Government's approach to spending now leave all areas of education funding under threat," their joint report said. "In these circumstances, personnel and equipment must come first."

Unthinkability factor: 4

What it could save: £4.5bn

3. Raise tuition fees

What it would mean: David Willetts, the Universities Secretary, caused a stir last week by saying he wanted to "reduce the burden on the taxpayer" of student finance, by which the general taxpayer currently subsidises students who have the potential to earn more than their non-graduate contemporaries. Higher tuition fees would mean graduates bear a larger share of the "burden".

Unthinkability factor: 1

What it could save: £1.3bn a notional figure of 10 per cent of the universities' budget

4. Stop offering "lifestyle" treatments on the NHS

What it would mean: The NHS budget is £100bn a year, and has been ring-fenced by the coalition Government. Any cuts here are going to hurt, but perhaps some money could be saved by restricting certain forms of treatment relating to lifestyle, which alone cost the NHS tens of millions of pounds a year, but together could save billions. Cuts could be made to treatment for obesity, infertility and cosmetic surgery.

Unthinkability factor: 3-4

What it could save: £2bn

5. Means-test child benefit

What it would mean: It could be abolished, but there are options for softening the blow. It could be means-tested, saving £6bn; it could be limited to children under 13 as suggested by Frank Field, the Government's poverty adviser, saving about £3.5bn; or it could be increased and taxed, which would save £1.2bn.

Unthinkability factor: 2-4

What it could save: £6bn is the total annual cost, but means-testing will save £6bn

6. Abolish Sure Start

What it would mean: The Institute of Directors has called for a complete end to the "centrally directed" Sure Start scheme, which includes 3,500 children's centres in disadvantaged areas across the country, central to the last government's pledge to eradicate child poverty by 2020. The coalition is protecting Sure Start, despite claims by Labour that it would be scrapped under a Tory-led government.

Unthinkability factor: 3-4

What it could save: £1.15bn

7. Cut housing benefit by 10 per cent

What it would mean: Cut the overall housing benefit budget by 10 per cent, reduce the amounts payable in individual circumstances or lower the entitlement threshold, so fewer people are eligible for the benefit. Richard Wellings of the Institute of Economic Affairs suggests "a simple first step" of making HB claimants pay a proportion of their rent out of their basic benefits, and to reform rules that "in effect provide claimants with an entitlement to live in a particular area, no matter how expensive".

Unthinkability factor: 2

What it could save: £1.7bn

8. Means-test winter fuel payments

What it would mean: Introduce an income-based threshold on the system, which at present gives pensioners between £125 and £400 extra to help keep them warm during colder weather. When David Cameron introduced Sir Philip Green as a supporter during the election campaign, the clothing billionaire suggested the saving, explaining that a millionaire acquaintance was receiving the benefit.

Unthinkability factor: 3

What it could save: £1.35bn out of a 2.7bn budget, though the exact amount depends .

9. Pull out of Afghanistan and cut elsewhere in defence spending

What it would mean: Slash the annual bill for keeping almost 10,000 military personnel in Afghanistan by naming a date for an early withdrawal, and reviewing commitment to the Royal Navy's two new "super-carriers".

Unthinkability factor: 3

What it could save: £5.6bn including £2.6bn a year on Afghanistan and a purchase price of more than £1.5bn per carrier, plus running costs

10. Axe Trident nuclear submarine replacements

What it would mean: The Liberal Democrats are opposed to the "like-for-like" replacement of the ageing Trident nuclear weapons system, while the Tories want to push ahead. Former health secretary Alan Milburn urged Gordon Brown to scrap the submarines as a way to avoid cuts to the NHS. Scaling it down, or replacing it, could reduce the bill.

Unthinkability factor: 3

What it could save: £4bn If axed altogether

11. Halve foreign aid

What it would mean: We could decide that aid doesn't do any lasting good and stop the lot. But this is one of the coalition's protected budgets. It promises to raise it to 0.7 per cent of GDP by 2013.

Unthinkability factor: 3

What it could save: £3.7bn if the total annual aid spending were cut in half

12. Halve budget of Department for Culture, Media and Sport

What it would mean: We could scrap the department's entire budget of £6.8bn, which includes funding the BBC, the Olympics, museums, libraries, tourism and the Royal Parks and Royal Household. A more realistic option could be to cut it in half: by scrapping free charges for museums and galleries and central government funding for libraries, selling off parts of the BBC.

Unthinkability factor: 2

What it could save: £3.4bn

13. Abolish Business and Enterprise Department

What it would mean: Vince Cable wanted to scrap the entire department before he became its Secretary of State. A lot of its money goes on grants of questionable value – David Cameron last week mocked Cable's predecessor Peter Mandelson for getting out his "giant chequebook" and spending it in Labour marginals.

Unthinkability factor: 3

What it could save: £1.5bn

14. Introduce a wealth tax

What it would mean: If savage and "unthinkable" cuts are needed to public spending, then this needs to be balanced with unthinkable tax rises. A flat, one-off wealth tax would be simple although highly controversial and unlikely. A similar tax in France on net assets over £650,000 raises £2bn.

Unthinkability factor: 3

What it could raise: £2bn

15. Introduce bank taxes much higher than planned

What it would mean: We know that some form of bank levy is on the cards in next week's Budget. But the banks should pay a heavier responsibility for the economic crisis. Oxfam wants bank taxes to total £20bn, but simply doubling the planned amount would take it to £16bn.

Unthinkability factor: 2

What it could raise: £8bn If doubled

16. Capital gains tax on main residences

What it would mean: Mr Osborne is under fire from the Tory right for planning rises to capital gains tax in the Budget, and it is likely he will temper a blanket rise with exemptions. Putting whatever he does to one side, extending the tax to profits made on the sale of main residences, currently exempt, would raise several billion.

Unthinkability factor: 3

What it could raise: £5.3bn

17. Privatise parts of road network and road pricing

What it would mean: Tony Blair wanted to introduce road pricing across the entire network, using satellite technology in cars, but it was dropped amid fierce opposition. But some form of green taxes is needed. A report by the centre-right think tank Reform this week refers to selling off 10 per cent of the road network, which is valued at £75bn.

Unthinkability factor: 3

What it could raise: £7.5bn from roads sell-off, plus additional revenue from road pricing

18. Put up petrol duty by 6p per litre

What it would mean: Raising fuel duty will be opposed by the motoring lobby but environmentalists demand dramatic hikes. Successive chancellors have resisted major changes. A 6p rise is equivalent to a 1p rise in income tax, which would raise £4.5bn. It would be a hugely unpopular move that any chancellor would baulk at.

Unthinkability factor: 4-5

What it could raise: £4.5bn

19. Extend VAT to reduced and zero-rated items

What it would mean: George Osborne is expected to raise the overall rate of VAT, perhaps to 20 per cent, in his first Budget next week. Every percentage point rise is a £4.5bn gain for the Treasury, so this would raise more than £12bn. But a far greater revenue-raiser would be to broaden VAT to items which attract reduced or zero rate, such as food, children's clothes and electricity.

Unthinkability factor: 4

What it could raise: £31bn

20. And, finally, what won't cut it

One of the first acts of David Cameron's coalition was to order ministers to use public transport. It was eye-catching but the amount saved is minuscule compared to the public debt.

What it could save: £10m

Total Cut £98.9bn