How to really save £100bn

Britain’s GDP is roughly £1.2 trillion. The state now consumes about half of it, or £600bn. Experts say we must cut 10 to 15 per cent of this public spending—a hefty £100bn—right now or in a year or two. Some want this gap between spending and income partly closed with tax rises—but there is a broad consensus that, even with such measures, deep cuts are needed.

The December 2009 pre-budget report put Britain’s public borrowing at £178bn, and laid out vague plans (beginning only after the election) to halve it by 2013. But the March 2010 UK Economic Outlook report, from PriceWaterhouseCoopers, claimed only £20bn of further cuts could stop an “adverse bond market.” Put simply: cut deeply now, or suffer a crisis of financial confidence later.

What’s the answer? The most traditional is often derided as “salami slicing,” meaning that a little bit of spending is cut everywhere. This has the advantage of sharing the pain, but doesn’t tend to cut the most ineffective parts of government.

A second option is the “Canadian model,” promoted in Britain by the Institute for Government. This involves a “programme review” in which all state services are examined and the worst-performing dropped. The problem here is politics—these ineffective parts are often favoured by politicians, or popular with voters.

Ireland recently charted a third path, by letting the axe fall not on services, but on workers—asking public sector staff to take an average 7 per cent pay cut.

Markets have, so far, reacted relatively calmly to a sharp deterioration in public finances-—total debt as a share of GDP has risen from 40 per cent in 2005, to an estimated 82 per cent in 2011-—in part because even such striking figures are not extreme, either by international standards or in relation to past British experience.

The markets seem to feel that, in time, the government will get its house in order, and raise enough money from taxpayers to service its debt. But this is not always the case. Many countries, like Argentina and most recently Greece, have come under pressure from financial markets if their public finances seemed unsustainable. James Crabtree, associate editor

Cut middle-class benefits

Why not cut the bit of the state that the public wants reduced: the benefits bill? It needn’t hurt the worst-off. Start by making sure no benefits go to those who don’t need them. Take the child tax credit. This is not really a “tax” credit at all, because you don’t need to work to claim it, but a second (means-tested) form of child benefit available to 90 per cent of families, even those earning up to £58,000. Cut this and focus instead on those in most need. The same goes for universal child benefit, which could save up to £6.5bn a year. Neil O’Brien, director of Policy Exchange

Charge for schools & NHS

The typical household in Britain spends quite heavily on cars, foreign holidays, high-tech gadgets, leisure pursuits and home improvements. Yet people baulk at spending their personal income on healthcare or schooling for their children. Perhaps we should accept greater personal responsibility for the things that matter most in life. Where healthcare is financed by insurance, co-payments of 10-20 per cent are regarded as normal. Could something similar be introduced for NHS treatment? Many parents could afford to pay 10-20 per cent of the cost of state education—they might then take more interest in the quality of the education, too. Michael Prowse, former FT leader writer

End final salary schemes

The trick will be to persuade the bond markets that spending will come in below plan over the medium term without cutting so savagely that economic activity collapses over the next, fragile couple of years. I suggest a suspension of all final salary public sector pension schemes, which are paid for out of taxes. Pension rights earned up until now would of course be respected, but the government and its employees would start making contributions into a new fund tomorrow morning. The state would meet the first tranche of its employer-contribution liabilities by putting its shares in the nationalised banks into the new fund. Martin Taylor, former head of Barclays

Squeeze the baby boomers

As well as dealing with the deficit we will have to pay billions more over the coming decades on care for the elderly. The only fair answer is to make baby-boomer pensioners sell their homes and pay for their own care. They have done well out of the housing market, so the choice is between them paying up—even though their children will miss out on a fat inheritance—or forcing workers earning as little as £9,000 a year to fund care through taxes.

The boomers’ children might want their windfall, but this is morally undeserving, as it is unrelated to their effort or talent. Protecting the rights of the affluent to slosh their money down to the next generation should not be a priority for any government. Politicians who queue up to sing the praises of the family unit should also be less shy about calling on children to care for their elderly parents. Richard Reeves, director of Demos

Private school pensions

Teachers in the private sector pay into—and receive—the same final salary pensions as their counterparts at state schools. And while only 7 per cent of pupils go to private schools, they have double the teacher/pupil ratio. Private school salaries are often higher than those of state school teachers, so their pensions are too. Obliging private schools to start their own pension schemes would relieve the state of a burden, and with any luck would bankrupt quite a few establishments and bring their estates, teachers, parents and, most importantly, their pupils, back into the state sector, which needs them. Kate Clanchy, writer and former teacher

Cut public-sector wages

The wage bill in the public sector, expected to be £178bn in 2010, has to come down by 20 per cent. The typical public sector worker now earns 15 per cent more than one in the private sector, and enjoys far superior pension rights. Wage cuts at the top can be much bigger than wage cuts at the bottom. Leave it to individual outfits to work out how to do it. Paul Ormerod, economist

Make people pay to vote

Make voting compulsory and charge for it. Casting a vote would cost £10; failure to vote would incur a penalty of £50. On a 45 per cent turnout, the exchequer would raise about £1.1bn. It will also provide an incentive for referendums, thereby re-engaging people in the political process Ian Hurdley, Prospect reader, via the blog

Slash the NHS drugs budget

The NHS prescriptions budget exceeds £10bn a year. Eighty-five per cent is dispensed as generic products: patent-expired medicines manufactured and sold to the NHS at substantially reduced prices. But the 15 per cent that are prescribed by brand name are so expensive that their effect on the budget is enormous. Savvy consumers have got the hang of this: it’s why they ask for ibuprofen (generic) instead of Nurofen (branded), at the chemists. So why can’t doctors? Once a medicine is available generically, it should be a requirement that NHS pharmacists dispense it as such. Martyn Lobley, GP and columnist

Use the internet more

Ten million Britons have never used the internet. But if they were to make just one of their interactions with government each month electronic—as opposed to by telephone, face to face or on paper—then £900m per year could be saved. Enabling all Britons to use the internet should be at the heart of cost-cutting measures. It is inevitable that the government will digitise over the next decade, but there would be huge benefits both to individuals and the state if we were more ambitious on the pace and scope of change. Martha Lane Fox, champion for the government’s Digital Inclusion Task Force

Suspend big IT projects

According to a Times investigation in 2009, eight of the largest Whitehall IT contracts of recent years have entailed overruns of more than £18bn. The overall figure for government spending on IT is not known, but the numbers we do have point to a mire of waste. The procurement and management of vast projects like NHS patients’ records—which has cost £12.7bn so far and is still not in operation—are deeply flawed.

It’s time for the state to mothball some of them until they can be brought under control. Some of the bigger ones should in any case be broken up. And why buy expensive software and terminals when the rise of “cloud” computing offers remote access to IT services for a fraction of the price of conventional computing? Tom Chatfield, Prospect’s arts and books editor and author of “Fun Inc” (Virgin)

Run services locally

Reduce spending by 10 per cent on all locally-delivered services like healthcare, schooling and the police in exchange for complete freedom for local public service panels (chaired by the local authority) to decide how to spend their money. This could mean services actually improve in the best run places, while in the worst people could vote for better leaders. Matthew Taylor, chief executive of the RSA

Merge the Army, Navy & RAF

We should merge our three armed forces into one. The US Marine Corps—structured to provide a mix of the functions of a traditional army, navy and air force—consistently punches above its weight and, coincidentally, is about the same size as our combined armed forces (190,000). The Marine Corps model could both save money for Britain’s taxpayers, and improve our military effectiveness. Like the US marines, our disparate military units could unite around a clear and coherent mission: what is known as “rapid global insertion,” often by amphibious means, into troubled parts of the world. This specific mission (which is what the British military mostly needs to do anyway) in turn determines the way the military recruits, trains and buys its materials—saving plenty of money on needless hardware such as expensive fighter aircraft built for the separate and unlikely mission of air superiority. The US marines budget is $40-50bn. Compare this with the woeful inefficiency of Britain’s armed forces—whose total budget (£43bn) is not much bigger. Anthony King, professor of sociology

Don't protect arms makers

As a rule, the ministry of defence pays from three to ten times more than it needs to for any given item of equipment used by the armed forces. Justifications include “sovereignty”—we mustn’t be dependent on other countries for spare parts and tech support. In fact, British or British/European high-tech projects are always full of imported American parts, governed by American rules. The Eurofighter cannot be exported outside its participant nations without American consent, as it is full of American bits. This protectionism may provide jobs for arms workers—but at great expense. In a typical British/Euro project, one could buy a better American product off the shelf, give every redundant British arms worker £1m, and still save hundreds of millions for the treasury. Lewis Page, writer and former naval officer

Don’t let Sir Humphrey do it

Sir Humphrey can be trusted to propose the best opportunities for extra spending, but not the best opportunities for reducing it. For example, whenever the foreign office is asked to cut its budget it offers up the BBC World Service, safe in the knowledge that no cabinet would be so foolish as to agree to it. So cuts will have to be made top-down. Some are obvious, such as reduced capital expenditure on defence and an Irish-style cut in public-sector pay. But beyond that a helpful rule of thumb would be to reverse the departmental budget increases of the past five years: the most rapidly increased budgets are likely to have deteriorated most in the quality of spending. Having set the overall cut for each department, ministerial teams could be left to choose specific ones. Paul Collier, developmental economist

An ex-Sir Humphrey has a go

Where should the axe fall on public spending? The answer is: “On all of it, and a bit more.” Recent public spending has been based on a massive misjudgement about the resources available to support it. This is the most basic error that can be made in the planning of public spending. So to bring public sending back to where the government intended it to be, it will all have to be recalibrated over a period of years, including health, education and overseas aid, to match the lower level of productive potential.

Prior to the financial crisis the treasury believed that the underlying growth rate of the economy was 2.75 per cent a year, though it claimed that it planned public spending on an assumption of 2.5 per cent. In the budget of 2008, produced before the full effects of the crisis were apparent, the treasury projected that public spending as a proportion of GDP would reach 42 percent by 2010-11, slightly above the average of the previous 20 years. In December 2009, that figure was projected to reach 48 percent, back to the levels of the early 1980s. If that were simply the result of the stabilisers working—higher spending on unemployment and so on—then this increase would reverse itself as the economy recovered. But the treasury has also estimated that the recession has reduced productive potential by 5 per cent. Some economists dispute this and argue that the one off loss is bigger, that the pre-crisis trend was exaggerated, and that growth will resume at a lower rate.

And why “and a bit more”? Two years ago we expected future public debt to be just under 40 per cent of GDP. We now expect it to be about double that. The interest on the extra debt will cost around £35 billion a year, which will have to be found by cutting back other programmes Andrew Turnbull, former permanent secretary to the treasury

Cut across the board

Even the cleverest central government officials can’t be trusted to work out what to cut: we often lack good data on which bits of the public sector are good at delivering their functions and which aren’t. Instead, a 20 per cent across the board cut in almost every departmental budget is the best strategy. And Whitehall has always been successful at defending its quangos. Each might be small beer individually, but axeing a lot would make a difference. Add to this the junking of nearly all existing tax breaks and business incentives schemes and you’d begin to make inroads. Diane Coyle, economist

Let’s scrap defence

Did you know that local government spends £100m on defence? What is that: pikes and halberds so Lambeth can defend itself come the day that Hackney invades? We’re knocking that one on the head for a start.

We can’t abolish pensions—it would save £119.1bn but would end up donating twice as much as it saved to the legal profession from aggrieved workers suing their employers. So you abolish the entire defence budget, of £43.6bn. But here’s the clever bit: abolishing defence helps steer what you cut next. Among the cuts will be public transport infrastructure, subsidies to agriculture and mineral extraction, environmental and anti-pollution initiatives, street lighting, the national grid, and that sort of thing. You might have to dismantle a bit of the NHS, too: not the bureaucrats, who are fine where they are, but the frontline staff.

The country is, after all, now completely defenceless. The trick will be to make sure it’s a place nobody in their right mind would want to invade: a backward country awash with angry, out-of-work former soldiers just gagging to form militias. After one look at Iraq, who’d get involved with a country like that? Sam Leith, freelance writer and editor

More homes and roads, fewer railway stations and universities

Houses Relax planning laws so that Britain builds more than 0.5m houses a year for at least a decade. More houses mean lower housing costs, which means lower benefit spending. Government revenues from stamp duty and VAT will be boosted, because moving house means buying new items. It would create jobs because bricks, tiles, glass, plasterboard, concrete and so on are largely made in Britain. More employment increases tax revenue, cuts benefit spending, and raises GDP so that government debts fall relative to income.

Roads Provide more roads. People will drive more, and (voluntarily) pay more to the government in petrol taxes. Petrol taxes are high enough to cover not only the cost of construction, but also to allow the extra carbon dioxide to be offset (through carbon permits) and to yield a profit for the government. Carbon neutral roads, no new taxes, and a lower deficit—that sounds like an idea that stacks up.

Railway stations There are 2,519 of them in Britain. One is used by over 66m people a year (the poor souls at Waterloo). But almost half are used by fewer than 12 people an hour in each direction and account for less than 3 per cent of all journeys made by train. With virtually no passengers, they need a lot of subsidy. The government should devolve them to local authorities, who will soon find that local people have different priorities.

Universities Convert some to community colleges. Two thirds of US undergraduates attend these, which serve harder-to-reach groups, deliver a real boost to people’s incomes and are dramatically cheaper than traditional universities, both for students and taxpayers. It makes sense to send more young British people to university than we do now—but not to high cost ones on the traditional model.

Tim Leunig, economic historian at LSE

And finally...

• Auction our permanent seat on the UN security council to the highest bidder.

• Abolish the department for business, innovation and skills—and most of what it does.

• Scrap tax relief for private schools.

• Abolish subsidies for solar power and domestic wind turbines.

• Axe daily postal deliveries in many areas.

• Reduce tube and train subsidies.

• Stop building social housing that is expensive to maintain.

• End the subsidy on student loans when people are in work.

• Charge £25 to file a paper tax return.

• Chop the Olympics spending.

• Abolish any agricultural spending over which we have discretion.

• Abolish arts funding.

• Require firefighters, military personnel and police to do non-frontline jobs until a normal retirement age. Their pension would be based on highest pay and these jobs would be at lower pay (police can man the desk and do the paperwork aged 55-65, or whatever daft age it is that they retire).

• Cap ISA relief at £50,000 per person.

• Cut CGT allowance to £1,000.

Tim Leunig, Jon Norton and others



Add your suggestions on cutting public spending on Prospect’s blog First Drafts, www.prospect-magazine.co.uk/blog