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4 November 2010

Why the coalition will struggle to make its cuts

Osborne will have to raise taxes or slash front-line services as “efficiency savings” of £35bn fail

By George Eaton

Since last month’s Spending Review, political attention has focused on the fairness (or otherwise) of the cuts and the likely effect on the economic recovery. Remarkably little thought has been given to another pressing question: how hard will the cuts be to implement?

Today’s report from the Commons public accounts committee attempts to fill this void – and the outlook for the coalition isn’t good.

The report warns that only £15bn of the £35bn of savings identified in the 2007 Spending Review have been achieved, and just 38 per cent of those were considered “legitimate value-for-money savings”. The Communities department, for instance, which faces cuts of 51 per cent – the largest of any department – has made only £40m of savings against a target of £987m.

Some will undoubtedly portray this as an indictment of the Brown years, but here’s the rub: if Whitehall fails to cut spending by £35bn (roughly 3 per cent of departmental spending) how will it ever meet George Osborne’s target of £81bn? Faced with this conundrum, Labour MPs fear the coalition will resort to slashing front-line services to reduce costs.

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Michael Portillo, once chief secretary to the Treasury, warned Osborne back in July that theoretical savings often fail to materialise in practice. He suggested that the coalition would have to raise considerably more through taxation. After all, during the last significant period of fiscal retrenchment in the 1990s, Ken Clarke split the pain 50:50 between tax rises and spending cuts.

Higher taxes or higher cuts? That is the unpalatable choice facing Osborne.