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20 July 2010

Here’s why Osborne will have to raise taxes

Get ready for tax rises as “efficiency savings” of £35bn fail to materialise.

By George Eaton

With the coalition still planning to cut all non-ring-fenced departments (that’s everything except Health and International Development) by 25 per cent, this morning’s report by the National Audit Office should serve as a wake-up call.

First, it found that Whitehall departments are almost certain to fail to make the £35bn of efficiency savings promised by the last Labour government back in 2007.

Second, it found that, of the £10.8bn in savings already reported by the government, many are unsustainable. After reviewing around £2.8bn of the total, it found that only 38 per cent “represented sustainable savings”, with 44 per cent rated as “uncertain” and 18 per cent as non-existent.

These figures are highly significant because the Conservatives’ pledge to cancel the planned rise in National Insurance assumed not only that Whitehall would save £35bn, but that the Tories could save £12bn on top of this.

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The government will undoubtedly portray this as an indictment of the Brown years but here’s the rub: if Whitehall fails to cut spending by £35bn (around 3 per cent of departmental spending) how will it ever meet George Osborne’s target of 25 per cent cuts?

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The likelihood, as Michael Portillo, once chief secretary to the Treasury, has argued, is that it won’t. Theoretical savings often fail to materialise in practice and the civil service is notoriously astute at protecting departmental budgets and evading cuts.

What this implies is more tax rises. Like Portillo, I am highly sceptical that Osborne will maintain his plan to reduce the deficit through a 77:23 ratio of spending cuts to tax rises. The coalition may be forced revert to something like the 50:50 split adopted by Kenneth Clarke during the last major period of fiscal retrenchment in the 1990s.

Still, one veteran minister has apparently had no trouble identifying cuts of 40 per cent. Here’s what he told Benedict Brogan:

Oh, that was easy. I just threw in plenty of programmes for children and vulnerable people. That should give them something to think about. I wasn’t born yesterday. If that’s how they want to play this game . . .