In a shock demand that could put hundreds of thousands of jobs across the country at risk, government departments have been told to prepare plans for departmental budget cuts of not 25% but now of up to 40%.
There are a few areas that will not be subject to this austerity drive. Health and international aid will be ring-fenced with health actually getting a small increase. Defence and education are partially ring-fenced with cuts projected to be within the range of 10-20%.
All departments are expected to reduce administrative costs by 33% or even up to 50%.
Cuts of 40% are though unlikely to happen. It seems that what departments have actually been asked to do in a letter from Danny Alexander the LibDem Treasury chief secretary, is to prepare "illustrative plans" by the end of July that will be used to "inform" future decisions on cuts. The idea being that when looking at large cuts ministers can see what the effect is likely to be. This was confirmed by Philip Hammond, secretary of state for transport, on the Andrew Marr Show this morning.
The government has said that cuts to the annual £156 billion deficit are needed in order to maintain market confidence in the UK. Labour take the view that such cuts will damage the frontline services that people expect to receive.
Already the new Office for Budget Responsibility (OBR) has predicted job losses of about 600,000 by 2016 with cuts of 25%. This would be far higher for 40% cuts.
The final details of any cuts will be announced in the Comprehensive Spending Review (CSR) on 20th October.
Public sector unions have already warned that they will conduct co-ordinated industrial action if cuts in the order of 40% occur.
Average cuts across all departments of 25% but protecting some will of course mean that most will have to find far more than that 25%. This exercise will give ministers a menu of options to allow them to choose the least worst (political?) option.
This could backfire:
http://broadoakblog.blogspot.com/2010/07/david-cameron-may-face-his-majorlamont.html
That's a good piece Sackerson.
It's going to be interesting to see how near to 40% the average cuts go.
I don't see the similarity Sackerson. Everyone (okay not everyone, but those who took an interest and had some idea of how the game works) saw through Lamont's desperation that day and knew the outcome
I don't think this is a gimmick or desperation but I do think the media have put an unhelpfull slant on the story. Jeff sums it up very sensibly:
"Average cuts across all departments of 25% but protecting some will of course mean that most will have to find far more than that 25%. This exercise will give ministers a menu of options to allow them to choose the least worst (political?) option."
I take the story at face value and assume they intend to go through with it as announced (or leaked). They know they need to. How insightful the "(political?)" comment is we'll have to wait and see.
Where I would disagree is tax policy. I don't like the VAT rise because it penalises the least well off, relatively more than the better off. I would have preferred to see a rise in the basic rate of income tax and a bigger drop in Employers National Insurance. Hopefully they'll revisit that as they push towards higher personal allowances.
The state is too big in my view but if people want a big state that's what we'll have. The important bit is we have to pay for it from current taxation revenues, not borrow it from the future. Provided the books are at least balanced there is probably plenty of leaway in reducing the outstanding debt more slowly but we're a long way from a balanced budget.
Hi Phil: I agree there are differences, there always are; but the situations are similar in that there is a very uncomfortable reality (weakness of the pound then, weak economy and huge debt now) and ultimately it cannot be resisted. Cameron is between a rock and a hard place – savage cuts now (perhaps not possible in a quasi-democracy) or economic/political breakdown and an even worse reduction in standard of living later.
What I was saying was that there comes a point when the market realises that even the little Dutch boy knows the dam is going to break, and if Cameron plays the scare vuvuzela too loudly the market will think we're at that point already. Management of perception is key – look at how Peston's public comments on Northern Rock shortened the time the government had to deal with the situation.
P.S. I agree with you in principle re extra income tax, because it's progressive.
But it may not be a practical possibility because (1) we let the rich get so powerful that they can influence public policy and/or leave the country with "their" wealth that they've sucked out of the community and (2) the debt-financed prosperity fantasy that began in 1980 has loaded the working population so heavily with financial obligations that they can't also pay a lot more in tax.
So we (a) need to deal with offshore tax havens – I'm reading Rawnsley's book on New Labour and he quotes a figure of £10 trillion squirrelled offshore – and (b) introduce some sort of debt forgiveness program, not for the banks but for the people.
Debt forgiveness when the banks are publicly owned is crazy. I can never agree with debt forgiveness. I do expect widespread bankruptcies in the next few years. Those who over borrowed should learn a lesson and those who forgot the lessons of the last downturn in property and believe that prices only go up in the long run need to see a different reality. High property prices are bad for Britain.The bursting credit bubble has to smash asset values (property) because high inflation and Sterling bearing the brunt is abhorent to the majority.
Phil: how about indirect support by helping first-time buyers, as in Australia? they introduced a $7,000 grant in 2000 and an additional $7k or $14k for those who bought between Oct '08 and Sept '09 (half the latter amounts after that, till Dec '09). This helped keep up house prices and prevented the collapse that Oz economist Steve Keen had predicted.
http://www.dtf.wa.gov.au/cms/content.aspx?id=344
House prices are too high.
Who should fund such a subsidy?
Higher inheritance tax might do it?
@Phil Grimm
"Higher inheritance tax might do it?"……….too many decent ordinary working families have fallen into the threshold of inheritance tax already….thanks to higher house prices.
But you do raise a good point.
I think we may be coming to a stage where we should ask ourselves can we really service our debt without inflicting too much pain on the people who do actually generate revenue for taxation?
@Saxerson
Should the government be focusing on introducing new first time buyers to a market that is already way overpriced?
First time buyers will be more than able to afford new houses after the impending house price crash.
It all seems rather messed up to me.
Excellent blog by the way!
Richard,
Yeah, makes a change to get a conversation going.
Obviously I'm in the camp that thinks house prices have to fall in real and nominal terms quite drastically but it might not happen dramatically. In other words I see a long deflationary depression ahead and I'm exhilarated at the prospect. I know that sounds callous but I am so that's how I come across. I find it very hard to care at all about people who have no connection to my life. Every blogger I've ever read is more important to me than most of China, India and South America put together.
I've been a very busy man recently so haven't had much chance to join in with conversations myself……music, family, this site and a million other pies I have inserted a part of my anatomy into.
Just moved to a small part of paradise as you will see in the article in lifestyle and travel…..
So at last there is some return to normality which I have not had since the end of last year…
I know how it feels.
I spent from last September until this June living out of a bag!