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  1. Business
  2. Economics
30 September 2013

What will you cut next, Mr Osborne?

The Tories' plans mean that tax giveaways can only be funded by even deeper cuts somewhere else. Labour should take a different path.

By Andrew Harrop

George Osborne’s speech did little to answer the question that is at the heart of the Tories’ plans for the next election: what will be cut next? The conference has opened with news of mortgage guarantees, tax giveaways and the introduction of a new ‘Help to Work’ programme, but this week’s announcements will be dwarfed in scale by the spending plans the government has already published earlier in the year, which promise a further £24bn of cuts in 2016 and 2017.

The Fabian Society’s commission on future spending choices has examined the impact these plans might have. We found that if all the cuts were levied on day-to-day public service spending, department budgets would fall by 8 per cent over two years. In principle these cuts could be spread thinly between public services, but continued protection for the NHS and schools is more likely. If all the areas George Osborne protected in this summer’s spending round were safeguarded again, on average, other public services would see their budgets fall by a quarter. Coming after so many cuts during this parliament, areas like local government, the criminal justice system and further education would face collapse.

At last year’s Conservative conference, George Osborne set out his alternative: a further £10bn of social security cuts. So far, in the face of Lib Dem resistance, he’s found only one third of that total – by restricting increases to many benefits to 1 per cent a year. Presumably a Conservative manifesto will promise further restrictions to social security and our commission looked at where £10bn of benefit cuts might come from. The news is not good for politicians looking to win elections: we concluded that savings on this scale would only be possible by reducing pensioner entitlements or means-testing all the remaining universal entitlements for working-age households.

Attacking the popular parts of social security would be highly controversial of course, but it would only slightly ease the pressures on public services. Even after £10bn of new social security cuts, many departments could still face budget cuts of 15 per cent over the two years from April 2016. So when Conservative politicians offer more of anything over the next 18 months, voters should beware. On their current spending plans, a new promise can only mean even deeper cuts somewhere else.

There is an alternative, according to the Fabian commission. With the economy finally growing again, big post-election reductions to social security and public service spending are a choice, not a necessity. Whichever party is in power, there will need to be financial discipline and tough choices, but there is also more room for manoeuvre than George Osborne seems to think. This is because today’s unexpectedly strong economic growth will translate into higher than predicted tax revenues. The Conservatives are earmarking this money for pre-election tax cuts, but it can instead be used to stop cuts. There is also the option of raising taxes for high income groups who are set to be the first to feel the benefits of recovery. Together these two measures would more or less avoid the need for cuts after 2015.

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This week the Conservatives are confirming they would prefer a different route. Devoting the ‘proceeds of growth’ to pre-election tax cuts may seem like good politics, but it will create avoidable devastation to public services and further reduce public spending in areas critical for future economic success.

So far Labour has been silent on its post-2015 spending choices; it was the missing link for the party’s conference relaunch. But in due course Labour must set out spending plans which are fiscally water-tight but also entail spending more than the Conservative’s plan for cuts.

This is the, so far unspoken, dividing-line which will come to shape the next election. Labour should start to shout about it, because Conservative tax cuts will come with huge costs.

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