Forget the waffle about cutting £12bn of waste out of government from the Conservatives and £11bn of efficiencies from Labour. We now have a firm policy from the Tories: to cut £6bn (or 2.8 per cent) from government departments’ 2010-11 budgets. The savings will be used to fund reductions in national insurance contributions for employees and employers. What can we say about this policy:
- Deep, clear and immediate budget cuts. The £12bn headline reduction in “waste” is, in reality, a simple cut of £6bn in departmental expenditure limits for 2010-11 for all government departments excluding health and overseas aid. These departments have budgets for next year of about £215bn and losing £6bn will lop off 2.8 per cent from these budgets. This will be challenging since Budgets are already set for next year, and the cuts cannot start until after the election, but firm central control should make the cuts achievable. After adjusting for inflation, the cuts are 5.1 per cent in these unprotected departments.
- The specific cuts are vague. The clarity of the overall cuts is matched by vagueness on where the axe will fall – the Conservatives say they need more time. We are told that frontline services will be protected, but this is a pledge that cannot be made now. The only thing we know is that departmental budgets will be lower – on average by 2.8 per cent.
- National insurance will be cut in 2011-12. How does Mr Osborne arrive at his pledge to make families £150 better off (a year) with the rather complicated-sounding rise in the primary threshold of £24 a week? The maths is simple. Most individuals will not have to pay 12 per cent national insurance on £24 of their earnings a week. This gives a gain of £2.88 a week or £150 a year. People earning over £45,000 lose marginally because they will have to pay an additional 10 per cent national insurance on £29 a week (£150.80). This tax cut, plus an equivalent cut to employer payroll taxes costs almost £6bn.
- The National insurance cuts are a difficult sell. Hands up. Who knows the rate of class 1 employer national insurance? What about the difference between the lower earnings limit and the primary earnings threshold? No. Well this tax cut will be harder to sell than a cut in the rate of income tax, for example.
- Deficit plays second fiddle. Just a few weeks ago, David Cameron, the Conservative leader, and all his economics front bench insisted that deficit reduction was their first priority. Mr Cameron said to a City audience earlier this month (2 March): “To get the economy moving, you’ve got to lift the black cloud of the deficit”. Now tax cuts are the most pressing priority for the Conservatives. This message flip-flopping is a bit weird.
- Finite waste in government. It must be true that the degree of waste in government is finite. If the Conservatives are spending some of this “easy” waste reduction on tax cuts, they will be getting to the more difficult to cut bits of government rather earlier than Labour. Now they claim to be much better at identifying and eliminating waste than Labour. That might well be true or it might be false, but so confident are the Tories of their abilities, they can use up some deficit reduction ammunition for a tax cut.
