“But identifying the £6 billion of savings in 2010 gives me the confidence that we can now say with certainty that we will be able to act more quickly on the deficit and at the same time avoid the most damaging part of Gordon Browns national insurance tax rise.
George Osborne, Shadow Chancellor, 29 March 2010
To cut or not to cut – it’s one of the key dividing lines between Labour and the Conservatives. They both say they will cut the UK deficit, but when they start paying the debts off is a different matter.
Labour says that to act to cut the debt to early would jeopardise the economic recovery; the Tories say delaying action is irresponsible. Consequently the debate boils down to starting to cut this year or next.
And yesterday was no different. Shadow Chancellor George Osborne christened the room the Conservatives will use for all their election press conferences with an announcement to make £12bn of efficiency savings in 2010/11, £6bn of which will be used to start paying off the deficit.
But at the same time, he and his team announced they would block a planned rise in national insurance that is set to kick in from April 2011, a cost, Osborne admits, of £5.6bn.
So can the shadow Chancellor cut the deficit and cut taxes at one fell swoop?
The Institute of Fiscal Studies (IFS) predicts that if the Conservatives are going to cut the deficit more quickly than Labour, as they assert, they will need to find an additional £8bn by 2015/16 on top of Labour’s predicted savings.
Osborne said that advisers Peter Gershon and Martin Read (both of whom have carried out efficiency reviews for the current government) have identified £12bn savings.
Of that, he says, £6bn is in health, overseas aid and defence. Since the Conservatives have already committed to maintain spending on the NHS and overseas aid, these budgets will be ring-fenced and any efficiency savings ploughed back in.
For defence, the department is undergoing a strategic defence review this year, so this money will also be protected pending the outcome of that review.
So that leaves £6bn efficiency savings, which, Osborne says, can be used to pay down the debt without hitting frontline services. So far, so clear.
But this is not money in the bank. It is efficiency savings the shadow chancellor expects to be able to make in different departments.
And “efficiency savings” are difficult to predict. In its review of last week’s budget, the IFS said “we should be cautious” of promises of efficiency savings, citing the government review led by the aforementioned Peter Gershon.
Robert Chote, the IFS director, said in his comments on the budget: “The NAO still disputes the governments claimed savings from the Gershon Review in the 2004 spending review.
“And, of the £35 billion of savings it is seeking in the three years from April 2008 to April 2011, even the government claims in the budget to have found only £10.8 billion – less than a third – over the first half of this period.”
But even assuming Mr Osborne meets his target to raise £6bn, he will then need to cover the cost of not raising national insurance next year, which he and the IFS believe will total £5.6bn a year, falling to £4.3bn over time assuming businesses pay higher wages as a result of not having to pay their part of the NI contribution.
So it seems that Mr Osborne will in effect render his savings neutral as he will need this cash to cover the cost of blocking the national insurance rise. FactCheck has asked the Conservatives how the changes to National Insurance will be paid for, but at the time of publication had received no reply.
Mr Osborne himself does say that the Conservatives will have a spending review later this year to identify more savings, but gives no number for how much these efficiency savings will be, and, as with the 2010/11 efficiency savings, there are no guarantees.
So, as the IFS analysis of Mr Osborne’s announcement concludes: “The Conservatives claim that the spending cuts can, in effect, be rendered painless by efficiency savings that they say their advisers have identified. Whether or not that is true, using the bulk of these spending cuts to finance the NI cut means that they are not available to contribute to the task of reducing government borrowing that the Conservatives have set such store by.
“Reducing the deficit more quickly than the government plans to will therefore require even greater cuts to public services spending, or to greater reliance on welfare cuts or tax increases that might be as economically costly as the NI increases they are seeking to mitigate.”
If Osborne can raise £6bn through efficiency savings, and it’s a big if, then yes, in the short term he could start paying off the debt sooner than Labour by offsetting this saving against the deficit this year.
But, as the IFS concludes, his pledge to block the national insurance increase cancels out the savings in the medium term.
He would still have to find almost all of the extra £8bn on top of Labour’s cuts and savings plans which the IFS predicts he will need to pay off the deficit faster if he is going to win the big UK debt battle.
And that is money he is unlikely to look for until after the election.
UPDATE: The Conservatives replied to FactCheck to say they believe the £6bn efficiency savings will recur in subsequent years, and the National Insurance rise will be paid from efficiency savings in 2011/12.
However, this still assumes that they reach their targets for efficiency savings, both this year and in subsequent years, and even if they do they will still need to find extra savings to meet their timetable for paying off the deficit.