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Spending cuts could hit benefits and pensions

By Alice Tarleton

Updated on 08 June 2010

Chancellor George Osborne sets out the framework for the "painful" spending cuts ahead, and a review of benefits, as Treasury chief secretary Danny Alexander tells Channel 4 News it would be "wrong to exclude whole swathes of spending".

George Osborne

The chancellor outlined plans for a "fundamental reassessment of role of state" similar to that undertaken in Canada in the nineties.

Areas up for review include, for the first time, social security benefits, tax credits and public sector pensions, as well as departmental spending on public services.

Danny Alexander, the Treasury chief secretary, told Channel 4 News that the coalition government was looking at every aspect of spending.

"We've set out in the document today we want this process to be based on the principle of fairness," he said, while warning "it would be entirely wrong to exclude whole swathes of spending from this review."

Credit ratings agency Fitch today warned the UK faced a "formidable" deficit reduction challenge, hinting the UK's gold-plated triple-A credit rating could be at risk unless the coalition sets out plans to deal with the borrowing black hole.

The Fitch report sent the pound tumbling, giving up ground recently won against the euro. The pound was below 1.44 dollars at 5pm, compared to almost 1.45 dollars at the previous close.

Rather than the top-down approach of the previous government, with government spending limits set by the Treasury, Osborne told MPs the coalition would bring together all parts of society for what he called the "greatest national challenge of our generation".

Osborne confirmed spending on the NHS and overseas aid would be protected, and promised to "limit as far as possible the impact of the reduction in spending on most vulnerable in society and the regions of the country most dependent on the public sector".

Over the summer, the government will carry out a wide public consultation to give people their say on which programmes should be protected, and which government functions could be left to the voluntary sector.

Yesterday David Cameron warned the spending cuts ahead would change "our whole way of life" as the government tackles Britain's £156bn annual overspend.

"The decisions we make will affect every single person in our country," the prime minister warned in a speech, saying the effects of decisions made now may be felt for decades to come.

Key tests for public spending
Government programmes will be prioritised against the following criteria, the chancellor said -
- Is the activity essential to meet government priorities?
- Does the government need to fund this activity?
- Does the activity provide substantial economic value?
- Can the activity be targeted to those most in need?
- How can the activity be provided at lower cost? - How can the activity be provided more effectively?
- Can the activity be provided by a non-state provider or by citizens, wholly, or in partnership?
- Can non-state providers be paid to carry out the activity according to the results they achieve?
- Can local bodies, as opposed to central government, provide the activity?

The coalition has already set out £6bn cuts for the current financial year, including the scrapping of the child trust fund and reductions in quango and local authority funding.

Unions today said the cuts will inevitably lead to job losses and are "already putting frontline jobs and services on the line".

"What is being cut is far more than just waste and inefficiency," Nicola Smith from the TUC told Channel 4 News.

"We've seen cuts in programmes including building for children's playgrounds and for new schools. We've seen cuts in youth service funding, cuts to programmes that support young unemployed people, cuts in budgets for local police forces.

"So across the board, across frontline services, we're seeing an impact on what it'll be possible to deliver this year and that will have real impacts on jobs in the public and in the private sectors."

Lessons from Canada
David Halpern from the Institute for Government, who has studied Canada's drastic programme of spending reductions, said Canadians did not like the pain, but accepted it as it was spread across society.

"The key issue is that the pain was shared," he said. "That was the key element of public acceptance."

Canadian civil and public servants held public meetings in town halls to canvass public opinion on a solution to the country's debt, he added.

"It became a major unwritten rule of Canadian life, that you don't run deficits any more than you spend what you receive," Dr Halpern said. Read the full article and watch a video interview here.

But Canada's finance minister advised "caution" in copying the country's model.

"In the mid-90s what the government of the day did was to reduce transfer payments for health, education, and social services," Jim Flaherty told Channel 4 News's Economics Editor Faisal Islam. "This caused great hardship to [Canada's] provinces and resulted in reduced services in health, education and social services."

- Read more on Faisal's blog

Ministers have taken lessons from Canada, where a wide-reaching public consultation was held as the country grappled with its budget deficit in the early nineties.

As in the North American country, a "star chamber" chaired by the chancellor and chief secretary to the Treasury will  require ministers to justify their department's spending decisions.

The government will announce its emergency budget in a fortnight. An autumn spending review will set out more details on the pattern of spending in individual departments over the coming years.

Chancellor George Osborne and his Chief Secretary to the Treasury, Danny Alexander, took questions at the Commons despatch box. The spending consultation was discussed in the Commons debate on the Queen's speech which followed. 

Former Labour minister David Blunkett MP said Osborne's speech "makes me want to be sick. Because they know across the aisle and we know that we are not all in this together.

"It will be the people that we represent on this side of the House and some of the Liberal Democrats on the other side of the House who face the greatest difficulty.

Strikes destined for British streets?
Andrew Lilico, chief economist at Policy Exchange, writes for Channel 4 News on what is at stake for the government if unpopular cuts are implemented.

Around Europe the significant spending cuts and tax rises governments have announced to address their deficits have been unpopular.

In a number of countries, including Spain at present, they have triggered strikes. In others, such as Greece, there have been marches and riots. Some countries have even seen big rises in support for Communist parties - in Portugal such parties secured 18 per cent of the vote in September 2009.

What can we expect in Britain?

The largest spending cuts achieved in any one year in the UK since World War Two were the four per cent cuts in 1977 through the IMF programme. These led to a general strike, bodies not being buried, riots, and the German chancellor declaring Britain "no longer a developed country".

The cuts needed on this occasion are between two and three times as large as those of 1977. Strikes and large scale marches therefore appear very likely.

The message to politicians must be this: There are no easy choices here; no popular way to cut spending on this scale; and probably no way to do so without garnering widespread discontent and opposition. If you didn't want to be disliked, you should have got another job.

Read the article in full here.

A report out today from KMPG said that if UK public sector productivity growth in the last decade had kept pace with productivity growth in the private sector, the same public services could be delivered for £60bn less a year.

"Over the last decade [the Office for National Statistics] estimates productivity in the private sector has risen by about 20 per cent in the services sector whereas in the public sector it's either been flat or declined," Alan Downey, one of the report's authors, told Channel 4 News.

"There's a big gap there in terms of productivity and efficiency and it's really important if we're talking about cutting public services that we identify that gap and find a way of closing it."

He recommends instead a less bureaucratic state with a focus on payment by results - although he accepted that job losses would be a likely consequence of a slimmed-down public sector.

The independent Office for Budget Responsibility will publish new growth forecasts next Monday, the Treasury also announced. 

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