Darling has just 'postponed the pain'

Thursday, December 10, 2009

Alistair Darling has merely postponed the pain by marginally reducing borrowing in 2010 and storing up huge cuts in public spending in 2011 and beyond, the Local Government Information Unit (LGiU) has said in response the Pre-Budget Report (PBR).

The PBR called for a rationalisation for smaller Communities and Local Government funded community programmes and the scrapping of time-limited schemes in CLG. Also announced were extra efficiencies of £550m from local government, including more efficient waste collection and disposal, reducing the burdens of inspection, assessment and reporting requirements from across government and measures to reduce duplication and inefficiency between different tiers of local government.

But LGiU chief executive Andy Sawford said: "The Chancellor missed the opportunity presented by Total Place to join up local public spending to do more for less. Instead, by ring fencing a two-year real terms increase for schools and hospitals, he has created an uneven playing field in local public service delivery and undermined the rationale and enthusiasm for bringing services together in a more efficient and effective way."

He went on: "Councils have been working hard to keep their communities afloat through the recession, and the lack of clarity on spending past 2011 will not allow town halls to prepare for inevitable cuts with the innovation they excel at. By attacking bankers instead of fundamentally reforming the way the UK is governed by freeing up councils to act, the Chancellor has missed a trick."

The cebr agreed that Darling had gone for popular and vote-grabbing measures such as bank bonus taxes rather than tackling the real issues the economy faces. Senior economist Charles Davis said: "The Chancellor has used hopeful forecasts for economic growth to avoid taking the tough decisions that are necessary in order to bring down the United Kingdom's budget deficit. This appears to be a return to classic Labour tax and spend policy; ring-fencing the key public services, keeping current spending high, cutting back on capital expenditure yet raising taxes."

The Institute for Fiscal Studies reckoned that even though Darling increased planned spending (in other words, reduced his planned cuts) by around £15bn for 2011–12 and 2012–13 – and claimed that this would allow modest real increases in spending on 'frontline' schools and no real cuts in the 'frontline' National Health Service or in police numbers – this would still will leave remaining public services (presumably including the likes of housing, transport and higher education) facing severe real cuts.

The IFS's Robert Chote and Carl Emmerson wrote: "By the end of the next Parliament, the spending increases become less generous while the tax increases continue to bring in more revenue. So by 2014-15, the tax and spending measures announced ... finally start to reduce borrowing rather than increasing it – but only by 0.2 per cent of national income. One consequence of choosing to loosen before tightening is that public sector debt is now expected to peak slightly higher and a year later than anticipated at Budget time, peaking at 77.7 per cent of national income in 2014-15. As in the Budget, the Treasury is still planning to finish the fiscal repair job in 2017-18. This would require further tax increases and cuts in non-investment spending worth 1.9 per cent of national income or £27bn a year by 2017-18 – the Treasury plans to do about £3bn more than this."

The IFS's Mike Brewer added: "Even though September's inflation rate was negative, the government announced a 2.5 per cent rise in the state pension from April 2010, and a 1.5 per cent rise in some other benefits, including child benefit, disability living allowance, carers allowance and incapacity benefit. But the 1.5 per cent rise, costing £700m, is set to be only temporary [since] the Chancellor committed himself – or rather, his successor – to increase these same benefits by 1.5 per cent less than inflation this time next year."

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club reckoned that Alistair Darling faced "a difficult balancing act" in supporting the economy, keeping the financial markets happy, not straining public finances too much and preparing the way for a general election. He achieved some but not all of those aims.

"While the Chancellor provided very little support for the recovery – and indeed will begin to withdraw the fiscal stimulus in the New Year – he did nothing to derail it," Spencer said. "The big fiscal measures will not come in until 2011. The two-year slowdown on public sector pay and the capping of government pensions contributions will save £4bn a year, with a similar sum being raised by the increase in national insurance contributions. However, these figures will only make up about half of the £15bn that our calculations suggest the government needs to find to halve the deficit over the next four years. The next Chancellor will have to do much more to bridge the credibility gap, and in the meantime the risk of a downgrade remains."

According to the King's Fund, the NHS is really going to suffer from what was announced in the PBR, not least from its staff taking real-term pay cuts. The think tank said there will be a cut in the total NHS budget in real terms in 2011-12 and 2012-13 and wanted to know what the 'unprotected' 5 per cent of the NHS budget related to. There may be savings to be made in administration costs but if training or research are cut this could have consequences for future productivity and quality.

The King's Fund estimated that Darling's calculations plan for 6 per cent productivity gains every year for the next three years at least, which would be a real challenge since NHS productivity has fallen in the past 10 years by around 1 per cent a year.

Chief economist Professor John Appleby said: "As the population continues to grow and to age, more people will need care. Just to meet these extra demographic demands requires an additional real rise for the NHS of 1 per cent a year. A cash cap of 1 per cent on NHS staff pay increases will shave around 1 percentage point off the annual 6 per cent productivity improvement required. But for NHS staff this could mean a pay cut in real terms, and still leaves a big task for the NHS to make its money go further. There will have to be trade-offs if we want a health care system which is fit for the 21st century. Every pound spent in the NHS will need to be stretched further, but at the same time ensuring patient safety and quality of care are not compromised."