This morning’s research from the IPPR lays out in thorough detail just how difficult George Osborne will find it to meet his fiscal rules when announcing his spending review for the period 2015-2017 next year.
The think tank has analysed the forecasts from the OBR and the Treasury and calculated the cuts needed to make sure the current structural deficit is cleared by the end of the five-year period and debt is falling as a ratio of GDP by 2015.
Firstly, let’s assume no cuts are made to welfare. If that is the case, the chancellor needs to make average savings of 3.8 per cent from departmental budgets. If spread equally among the departments, that would mean hugely controversial measures such as cutting the NHS budget by nearly £8bn a year and education by nearly £4bn.
But the truth is these cuts are never spread equally, largely for political reasons. The PM may wish to repeat his promise to protect the budgets of both the NHS and international aid, for example.
This would take the cuts needed from education up to £6bn a year, but again this would prove highly politically sensitive. If we assume that Michael Gove manages to argue for a ringfence around the education budget, other budgets will have to take a hit of an average of 8 per cent. This would huge cuts, for example, to the MoD – nearly the whole cost of running the UK’s four destroyer warships.
But let’s say that Osborne argues his way round the intransigence of the department for work and pensions and agrees that the welfare bill needs to be reduced by £10bn.
The first problem in this scenario is how exactly to do this. The first idea – freezing working-age benefits for two years – would raise a good chunk of this – around £4bn a year. But what about the rest? There aren’t many obvious places left to cut.
Freezing or cutting tax credits for working people, as the coalition has done previously, would undermine the incentive for people to find work in the first place. Shrinking sickness or incapacity payments would look like the government is targeting the most vulnerable in society. Housing benefit could fall – but the prime minister’s previous suggestions for how to do this have been crude and easily picked apart.
The second problem is that it still leaves heavy cuts to departmental budgets. In what may be the most likely scenario – that health and international aid are ringfenced and education is at least mostly protected – it would still mean cuts to the MoD of around £2bn.
What about tax rises? The coalition could seek to spread the costs by levying additional taxes, or raising current ones. But there aren’t many taxes left for Osborne to raise. Income tax is set to fall, with the top rate falling from 50p to 45p, and the threshold rising. Corporation tax is also set to fall. VAT has already risen once, and is unlikely to do so again – coalition advisers fear that such a move could choke off recovery.
One popular move would be to bring in the Lib Dem dream of the mansion tax on properties worth over £2m. This would raise about £2bn – less than a tenth of the overall amount needed.
There is of course, one way out of some of this pain for Osborne. There is no particular reason to have debt falling as a proportion of GDP by 2015, and by abandoning the target altogether he could buy himself some much-needed headroom.