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2 February 2011

IFS: Osborne needs a plan B

Spending cuts could prove “formidably hard to deliver”, warns the Institute for Fiscal Studies.

By George Eaton

That oracle of economics, the Institute for Fiscal Studies, has just published its Green Budget (ahead of Osborne’s big day on 23 March) and two points stand out.

First, the IFS warns that the £81bn spending cuts could prove “formidably hard to deliver”, a fact to which remarkably little attention has been given.

Since the Spending Review, debate has focused on the regressive nature of the cuts and their likely effect on the economic recovery. But few have asked another pressing question: “How hard will the cuts be to implement?”

The IFS notes:

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In some parts of the public sector – such as in the Home Office and the Ministry of Justice – a combination of the depth of the spending cuts and low labour turnover means that a downsizing of the workforce on the scale implied by the Spending Review will be difficult to achieve cost-effectively on the proposed timescale.

Michael Portillo, once chief secretary to the Treasury, warned George 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.

With this in mind, as well as the probability that the economy will grow at a slower rate than the OBR expects, the IFS calls for Osborne to prepare a plan B for the economy.

Overall, with such large downside risks to the public finances, having alternative plans to hand could prove useful. The government should review its spending settlements in a couple of years’ time in light of any changes to the economic and fiscal outlook, or particular difficulties faced by departments in delivering spending cuts that are palatable to the government and the wider public.

It’s important to point out that the IFS isn’t calling for the coalition to change course now. Should Osborne use the Budget to reduce the pace of cuts, it warns, the Bank of England will respond by raising interest rates. But the long-term message is clear: it would either be highly reckless or highly stupid of Osborne to assume that all the cuts are achievable.