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Osborne to unveil £6bn public spending cuts

By Alice Tarleton

Updated on 24 May 2010

The Chancellor George Osborne and his Lib Dem deputy David Laws will spell out today where £6bn in spending cuts will be made this year.

Money: Getty

Talking this morning, Mr Osborne refused to give specific clues as to where the cuts would fall, instead saying that "each department will have their share of the cuts."

He said: "It's about showing the country that we mean business. It's also about saying that I don't want to be sitting here for 11 months knowing that this money is being wasted and not dealing with it.

"It involves cutting areas that are not delivering value for money, travel costs, renegotiating contracts..."

The Chancellor said he had sounded out the Governor of the Bank of England ahead of making the cuts this year, amid fears it could lead to a further recession.

He said: "We have inherited the biggest budget deficit in Europe. The real issue is about how nations pay off their debt – it's a huge risk to the British economy.

"This plan will stimulate economic growth and confidence."

He added that £500m would be reinvested back into the British economy to pay for initiatives including employment schemes for the young, at the request of the Lib Dems.

The coalition government have said the cuts will not affect "frontline services" - instead departments are expected to renogotiate contracts, cut out discretionary spending, control recruitment and reduce overheads.

Quangos as well as central government are expected to share the pain. 

But three departments are protected: savings found in the overseas aid, health and defence budgets will be reinvested elsewhere in the same area. So £6bn has to be saved by other non-protected departments, including education, transport, the home office. Most of the £6bn will be used to pay down the deficit, although an unspecificed amount will be used to support jobs, such as through cancelling some backdated demands for business rates.

Six weeks before the election, the Tories announced a similar programme of efficiency savings, based on statements from two of the Labour's waste-zapping czars. These were pretty vague on specifics, though - Vince Cable dismissed them at the time as "schoolboy economics".

"I don't doubt they can make £6bn savings this year if they want to," said Carl Emmerson, Deputy Director of the Institute for Fiscal Studies. "The worry is that you don't cut the right kind of spending - you may cut it because it's the easiest to cut."

Key dates to come
June 22: Emergency budget
Autumn: Departmental spending review

How much is £6bn?
The government is fond of pointing out that £6bn is only about £1 in every £100 it spends - or about 1 per cent. But they're focusing these cuts on public services spending, rather than the large wodge of things like public sector pensions, benefits, and debt interest payments which fall under a different budget heading. And because they're also protecting NHS, defence, and the international aid budgets, £6bn works out at 2.8 per cent of what's left. Another way to look at this is compared to what happened in the last financial year. Labour had already pencilled in total cuts of 2.4 per cent this year compared 2009-10. Some of this is because investment spending was brought forward to help see off the recession - but not all of it. Add what the coalition wants to do - and you end up with a 5.1 per cent cut on last year.

Longer-term spending cuts
The government is also reviewing all spending decisions and pilot schemes approved since the start of the year, including a number of school building and transport projects. In June it will hold an emergency budget, setting out how much it has to spend over the next few years. In the autumn, a spending review will detail how this is shared out between different departments. It says the immediate £6bn is a "down-payment" on future spending cuts.

How much do we need to save?
Labour had planned to get rid of much of the budget deficit as well - a total saving of £71bn a year by around 2016. They hadn't spelled out exactly how they'd do it either - so the coalition needs to find its own cuts, and also wants to accelerate the reduction.

But the size of the budget hole could also change. The new independent Office for Budget Responsibility is reassessing the Treasury's forecasts drawn up under Labour. If they revise down the Treasury's growth forecasts by 1 per cent of national income, the gap between tax revenues and spending increases by around £10bn, meaning the government has to find more money from somewhere.

It may not just be bad news, though - today's official public finance figures showed the country was actually borrowing less than had been expected in March's budget. Either way, we're not sure where the starting goal post is. It's also not clear yet exactly how much of the deficit will be paid down by spending cuts, and how much by increased taxes.

Spending cuts vs tax rises
The Conservative manifesto said 80 per cent of the deficit reduction would come from cutting spending. The Lib Dem manifesto suggested - according to IFS calculations - slightly less coming from spending cuts, and a slightly bigger proportion left to tax rises.

The coalition has said it wants the "burden" to fall on spending cuts, rather than tax rises. Until the budget, we can't be sure how many billions of pounds that "burden" translates into.

Kind cuts?
With the budget deficit - the amount the government has to borrow each year to fund what it spends - pencilled in at £163bn this year, whoever had won the election would have faced lean times and tough spending decisions.

The Conservatives spent many, many months calling for more aggressive action to cut borrowing. Labour - and pre-election, the Lib Dems - wanted to wait until April 2011 to start making savings. But the coalition has now agreed to start finding savings straight away.

The cuts will be outlined ahead of tommorrow's Queen’s speech, which will promise "freedom, fairness and responsibility".

A draft copy of the speech, leaked to the Sunday Telegraph and Sunday Mirror, shows key school reforms and the scrapping of ID cards could be brought in within days.

The Telegraph report says the first bill to be published will be an academies bill, enabling more schools to become academies. And a bill scrapping Labour's ID cards will follow soon after.

A programme of political reform could include measures for fixed-term parliaments and powers to enable voters to sack MPs if they are found guilty of serious wrongdoing.

A parliamentary reform bill could also be the vehicle for delivering a referendum on voting reform for general elections – a key demand of the Liberal Democrats in the coalition negotiations with the Conservatives.

The Telegraph report notes that five of the proposed bills will be led by the Treasury under George Osborne, reaffirming the Conservative chancellor's primacy over Vince Cable of the Liberal Democrats.








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