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Osborne 'must cut billions more'

Published 18/06/2015

Chancellor George Osborne needs to find billions of cuts more than planned to meet his targets, a think tank says
Chancellor George Osborne needs to find billions of cuts more than planned to meet his targets, a think tank says

George Osborne may need to cut £45 billion a year from public spending by 2018-19 to balance the books rather than the £30 billion of consolidation measures currently planned, a think tank has claimed.

The Social Market Foundation claimed the plans set out in the Conservative manifesto do not represent the "full scale of the savings needed".

The think tank argues that the £30 billion does not take into account the increased spending on areas such as overseas aid, the NHS and schools, or likely rises in the cost of debt interest payments.

The Tory manifesto committed the party to eliminate the deficit by cutting spending by 1% each year in 2016-17 and 2017-18 then freezing it in real terms in 2018-19.

The consolidation effort will involve £13 billion from departmental spending, £12 billion of welfare cuts and £5 billion raised from tackling tax dodgers.

But the SMF analysis claimed that the planned cuts would not go far enough when the increased expenditure was taken into account.

The think tank also assumes that the Government will not want to reduce gross capital spending below the levels set out in March.

The SMF's chief economist Nida Broughton said: "We found that the Conservatives' plan to save £1 per year in every £100 for 2016-17 and 2017-18, followed by a one year freeze in public spending in 2018-19, does not represent the full scale of the savings needed to meet their targets.

"This is because there are areas of spending that the Government has pledged to increase across the parliament that have not been taken into account, such as the NHS, schools and international development budgets, as well as capital spending and areas that are outside its direct control, such as debt interest payments, which add a total of around £6 for every £100 spent before the cuts even start."

Because of the protections put in place on budgets such as overseas aid, the NHS, schools, the scale of cuts in other areas of Government spending will go far beyond the "£1 a year in every £100" promised in the Tory election manifesto, the SMF said.

"As a result, we found that the actual savings which the Government has to make to meet its spending plans over the three years could be closer to £12 in every £100 across budgets within the Chancellor's scope," Ms Broughton said.

The analysis that the most significant risk to the deficit reduction programme was uncertainty over future economic growth and the tax revenues the Government can expect to receive.

The report said: " Growth in tax revenues, driven by a growing economy, is expected to play a substantial part in bringing the deficit and borrowing down.

"However, historical experience tells us that five years' worth of steady growth may be over-optimistic.

"More importantly, the Office of Budget Responsibility (OBR) is expecting potential GDP growth to start to pick up towards its historical long-term average. Yet, given the UK's recent poor productivity performance, this is far from certain.

"I f, over the next few years, the economy's growth potential continues at the rate estimated by the OBR for 2014-15, borrowing would fail to be eliminated by 2018-19, even if the Government implements the planned savings.

"Instead, borrowing would be running at around 1.8% of GDP. In this situation, it is likely that deficit reduction would have to be postponed."

The SMF recommended a two-part approach to finding the £45 billion of further consolidation measures it estimates are needed.

The first-phase "efficiency review" would find half of the required savings including the £12 billion of welfare cuts and just under £11 billion of departmental reductions or changes to tax measures.

A longer-term "reforms review", reporting in 2016, would aim to find the remainder of the savings.

A Treasury spokesperson said: "The Government has set out that around £30bn of discretionary consolidation is needed, and will continue to deliver its priorities within its overall fiscal plans.

"Britain was the fastest growing G7 economy in 2014 and 2015 because our plan is working - the deficit has more than halved. However, at just under 5% it is still one of the highest in the OECD. We have a clear plan to deal with this, and we will deliver it this summer and in the spending review.

"We've learnt there's no shortcut to dealing with the deficit, so we have to roll up our sleeves and get on with the hard work of returning the public finances to surplus."

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