Okay, we've had the pain, now let's see some reform

23 June 2010

The Budget has prepared the country for a future of retrenchment and continued pain, but the October spending review must deliver liberalisation and reform, says Prof Philip Booth, editorial and programme director at the Institute of Economic Affairs

There is no doubt that this budget has stopped the rot in terms of the build up of public spending and borrowing. However, we should not be complacent and it does not provide the springboard for the rebalancing between the state and the private sector that I had hoped for.

Much is made of the headline spending cuts figure of about £130bn. However, we must not forget that this is the level of cuts in previous projected increases in expenditure. Real terms total spending will remain more or less constant over the next five years.

As far as public sector workers are concerned, perhaps the biggest item is the two year pay freeze – though the Public Sector Pensions Commission might have some more shocks in store. This pay freeze will bring public sector pay – adjusted for skills – roughly into line with private sector pay, though there is still a big gap in pension provision.

To that extent it is a logical and reasonable public spending cut. However, it is also a missed opportunity. The public sector finds it hard to recruit in some areas of the country and much easier in others. Perhaps the Chancellor should have taken the bolder step of regionalising public sector pay – or, in the case of schools, hospitals and police, delegating the issue entirely to individual public sector employers. That approach would have the potential to lead to much less distortion of local labour markets by the public sector and also provide greater freedom to pay public sector workers more where recruitment is difficult.

No doubt many in the public sector will welcome the rise in the basic tax threshold by £1,000. Certainly pulling the low paid out of tax is a worthy aim. However, those above the middle of the earnings distribution in the public sector should look at the small print. The 40 per cent tax rate is going to start £2,500 lower and then be frozen. In recent years we have had a 50 per cent increase in the numbers in the higher tax bracket – it looks as if the number of 40 per cent taxpayers will soar again.

The big news for the public sector will come in October, at the time of the Comprehensive Spending Review. Here Osborne has a choice. He can follow a policy of retrenchment and continued pain, or one of liberalisation and reform. The latter route may well be resisted by trades unions but, in my view, it is the way to better healthcare, better education, a functioning welfare system and much better job satisfaction in the public sector.