Osborne will need even-bigger cuts to stick to his plan

The Chancellor must find £48bn in extra spending cuts or tax rises to meet his main deficit target.

The Autumn Statement is now just over three weeks away and a sense of déjà vu hangs over the scene. In the run up to the same event last year it was plain that poor economic performance meant that the Office for Budget Responsibility (OBR) would be the bearer of bad news for the Chancellor. And so it is again.

After a grotty economic performance in 2011, last year’s Autumn Statement was always going to deliver bad news. The Chancellor announced the need for a £15bn reduction in overall spending by 2016-17 in order to meet the government’s fiscal mandate of eliminating the structural deficit in five years.

But that wasn’t the whole story. Much social security spending is driven by things beyond the government’s control: rising rents push up the housing benefit bill, and retiring baby boomers raise the overall cost of the basic state pension. So to constrain overall spending in the face of a rising benefits bill, the Treasury was implicitly seeking a further £11bn of savings. In total, the plan was then to find some £26bn in spending cuts – since tax rises weren’t part of the plan – by 2016-17 in order to achieve the government’s aims.

Unfortunately, this year things seem depressingly familiar. At the Budget, the OBR predicted that economic growth would be 0.8 per cent this year, but independent forecasters now think it will be more like a 0.3 per cent contraction. As a result, public borrowing is running 10 per cent above the OBR’s March forecast. None of this is great news, but it wouldn’t be so bad if the higher borrowing was a temporary reflection of the weakness in the economy that would resolve itself once things get back to normal. Unfortunately, the Social Market Foundation’s analysis – part of a joint report produced with the RSA yesterday - shows that this doesn’t seem to be the case. At least not according the models the OBR uses.  

Unemployment has been falling for most of this year. While that’s a good news story in itself, it implies that the economy may have moved closer to its capacity. But with less far to bounce back, a bigger chunk of this year’s £122bn underlying annual government borrowing will remain when output finally does reach its full capacity. And the only way to fill that hole is to close the gap between revenue and spending.

Our analysis, using the OBR methodology, suggests that getting the government’s Budget 2012 plans back on track would require a further £22bn of spending cuts or tax rises by 2017-18. The Chancellor has some room to ease up on his plans and still hit his mandate, but whatever way you look at it, the OBR’s models suggest that a lot more fiscal pain is on the way. Combined with the cuts already planned, the total size of the task after 2014 could be £48bn by 2017-18.

If the Chancellor sticks to his plan to keep taxes unchanged and cut £10.5bn from the social security budget, most of the work will be done by cuts in public services. That would require 11 per cent real-terms budget reductions in every department over the first three years of the next parliament. And if health, education and international development spending were to be protected, the impact elsewhere would rise to an eye-watering 23 per cent.

All of this would come on top of the spending squeeze that’s already underway and planned to run until 2015. The consequences of the eight years of cuts would be to decimate spending in some areas, with some departments over 40 per cent smaller once the public finances are back to balance.

It must be hoped that the OBR’s models are wrong in their implications and that the economy is in fact still some distance from its potential level. But if the OBR’s advice follows it past form, the news will be grim, requiring cuts that will run deep into next parliament. Against a background of four years’ unprecedented cuts, a further squeeze on anything like the scale implied by the SMF’s analysis will represent the central issue at the next election, forcing on the electorate stark decisions about the kind of public services we want in the UK.

But we mustn’t have a re-run of the 2010 election, in which the three parties connived in presenting vague plans and disingenuous language to mask the scale of the problem. Osborne made a bold decision in setting up the independent OBR. Perhaps, before the next election he should make another, and require it publicly to adjudicate on the detail and viability of each of the main parties’ plans. If the electorate is to choose, it must be informed.

Ian Mulheirn is director of the Social Market Foundation

George Osborne will deliver the Autumn Statement on 5 December. Photograph: Getty Images.

Ian Mulheirn is the director of the Social Market Foundation.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.