George Osborne will stand up in the House of Commons on Thursday to announce the government’s intentions for public spending for the 2015-16 financial year in circumstances he neither anticipated nor wished for.
As a result of weaker economic growth and a revision to the estimates of the capacity of the British economy, the structural deficit that the coalition had hoped to eliminate by the time of the next election will exist well beyond it, meaning further spending cuts and tax rises.
Liberal Democrats must spell out distinctive ideas on how to continue deficit reduction.
Liberal Reform has a number of suggestions for George Osborne this week, and for our party on the road to the General Election in 2015.
First, the difficult issue of social security spending. The welfare budget ballooned during the second half of the Labour administration and by the time of the 2010 election had become unsustainable, particularly given the permanent loss of economic capacity caused by the crash of 2008.
Many of the coalition government’s reforms in the area of welfare were necessary and we applaud the work that Steve Webb has done in his department, recognising the need for cuts but doing his best to protect benefits for the most vulnerable.
Looking ahead to 2015, Nick Clegg has said that we have to look at the remaining benefits for the well-off. Liberal Reform would be clearer: social security should be for the poor, vulnerable and disabled, not for the wealthy, including pensioners. Labour’s boomtime handouts to the rich have to end.
However, we disagree with Clegg’s assertion that further cuts at the top of the welfare budget justify further reductions at the bottom. It may be necessary to cap increases for some time, but no more cuts should be made to out of work or disability benefits.
The party also needs to consider whether it is sustainable to leave the health budget untouched. In making savings, though, we need to be imaginative and open-minded: if the evidence suggests that efficiency can be gained through private sector involvement, we should accept that; it is better than blunt budget cuts.
So, what should we protect? At the very least, schools, universities and science. They are the areas of spending that can most directly help us create the liberal society we want to see.
On international development we are open-minded. It is a small part of government spending, but we are inherently uncomfortable with the idea of arbitrary targets for spending. The quality of that spending is more important than its quantity.
Circumstances demand, though, that all other departments must make further reductions.
We would resist Tory calls to protect defence spending, which has reduced by a relatively small 8% between 2010-14. Trident is an obvious area for savings in the medium term, but not in the 2015-16 window. As the Public Accounts Committee has warned, the defence equipment budget looks unaffordable, and we would start there.
On taxation, we would argue that the tax rises already implemented, most notably the VAT increase, are at the upper end of what is acceptable, both in what the British people are prepared to tolerate and in the economic damage that any tax rises cause. The UK tax take as a percentage of GDP remains roughly at its medium-term trend level, with increased spending responsible for the large deficit we still see. It is therefore spending where attention needs to be focused.
The fiscal consolidation planned for 2015-16 will be much more difficult than that started in 2010, coming as it does on top of significant savings. With many efficiencies already made, the public sector will have to be creative and open-minded in coming up with new, less costly ways of working that retain and improve the service levels that people demand. That will no doubt be difficult, but it is what being a responsible party of government demands.
* William Hobhouse is on the board of Liberal Reform and is co-founder of the Lib Dem Campaign for Manufacturing.