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Slash and burn

The Conservatives’ plans for making £6bn in efficiency savings during the coming financial year just

Spring has arrived early here in New England. The robins have returned from their southern sojourn and the sky is full of Canada geese heading north. And we are preparing for those deadly black flies that gain nourishment by feeding on the blood of other animals, especially me. They disappear once the temperature gets warmer, but for a few weeks they are a big nuisance when you go outdoors, as those of us who chase the little white ball tend to do.

The economy so far looks to be the big issue of the election campaign. The polls still suggest a hung parliament, just - even after George "Slasher" Osborne's announcement of the Tories' intention to reverse the National Insurance contribution increase due in 2011.

He was bolstered by a letter and follow-ups from a plethora of business leaders supporting him. In an interview, the Liberal Democrat shadow chancellor, Vince Cable, said: "I just find it utterly nauseating all these chairmen and chief executives of FTSE-100 companies being paid 100 times the pay of their average employees lecturing us on how we should run the country. I find it barefaced cheek."

He does have a point. I especially liked the comment from one wag who said that he trusted the Marks & Spencer chairman Stuart Rose's views on underpants more than his ideas about economics.

Waste a little

No one should be surprised that a bunch of highly paid CEOs support tax cuts. However, it remains uncertain that a cut in National Insurance (NI) would be good for the country as a whole or for anyone making less than a million a year, as it has to be funded. As I have said many times in this column, the fear of a double-dip recession remains. This past week, the OECD said that Germany had slipped back into recession in the first quarter of this year.

For months now, Slasher and David Cameron have banged on about the need to control the deficit and protect the UK's AAA credit rating above all else. That position seems to have been abandoned. They had already made it clear that they would cut public spending deeply, even without the NI tax cut. The Tories have promised to implement those cuts within 50 days if they win the election, so that would be by the beginning of July. But the move on NI is a new promise, as is the proposed marriage subsidy, which is to be funded by a levy on the banks. Funny they didn't ask the bank CEOs what they thought of that tax - or single mums, for that matter.

Apparently, the cut in NI contributions due next year will be paid for by "efficiency savings" this year. In a letter to the Financial Times of 7 April, Robert Skidelsky and I questioned how many of those business leaders who complain that raising National Insurance contributions is a tax on jobs realised that the efficiency savings that they are demanding would destroy jobs just as certainly.

Raising NI contributions attacks jobs by reducing profits per unit of output: an efficiency saving by government cuts costs by putting someone out of work. Both measures aim to reduce the deficit at the expense of jobs. That is why the government has wisely postponed raising NI contributions and cutting "waste" until economic recovery is under way in 2011.

The general point is that expenditure that would be "wasteful" in normal times can be useful in depressed times. When an economy is growing strongly, we need to cut out waste; when it is depressed, what is called "wasteful" spending can keep up aggregate demand, employment and sales.

So what exactly are the efficiency savings that Slasher intends to implement? Scant details are available, other than four pages of broad generalities outlined by two advisers, Sir Peter Gershon and Dr Martin Read. Below, I present Gershon's suggested savings for £6bn in the next financial year, which are broadly similar to those suggested by Read. They just don't look credible.

First, a new government should stop any major new spending on IT projects and cancel existing projects which are not worth completing.

Hard to see how contracts that have been signed can be stopped. Penalty clauses might well be invoked, which would increase spending, not reduce it.

Second, a new government should be negotiating significant reductions from its major suppliers.

Gershon says that the government needs to go to its suppliers and say, "I can't afford this contract any more - I need to spend less."

Great idea. I plan to go to my mortgage lenders and tell them times are tough, so I would like them to halve the interest on my mortgage.

Third, a new government should outsource its back-office processing functions without any delay to realise substantial savings.

Most of this outsourcing has apparently already been achieved. Few if any savings here.

Fourth, a new government now needs to take the same tough approach to costs that has led to substantial savings in the private sector.

The private sector over the past year has reduced employment by more than half a million. To save £6bn, you can fire 200,000 public-sector workers who are paid, say, £30,000 a year on average. A really bad idea.

Fifth and finally . . . stop trying to micromanage delivery and allow all providers . . . to innovate against some broadly defined outcomes.

Hard to see how this can generate any savings quickly, or what it means for teachers, nurses, civil servants or policemen. Hopeless.

Join the dole queue

Gerry Grimstone, adviser to the Treasury and chairman of Standard Life, writing in the Financial Times on 8 April, argued convincingly that these supposed savings seem implausible and fraught with danger. "This financial year has already started. The economy is in a fragile state. Incoherent attempts to deliver efficiencies will not deliver value for money and will damage the services people rely on in times such as these."

The only way to fund efficiencies would be for the Tories to fire 200,000 public-sector workers. Or they could simply not fill vacancies, causing youth unemployment to rise beyond the million mark. These cuts would be over and above those Slasher was already planning in his 50-day Budget. Horrid. The Tories' sums do not add up.

David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and visiting professor at the University of Stirling.

David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England's Monetary Policy Committee 

This article first appeared in the 19 April 2010 issue of the New Statesman, The big choice