20 October 2010
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The Comprehensive Spending Review (CSR) set out today the details of which Government departments will have to cut their spending and by how much. The cuts are necessary as the public finances are in a poor state. Indeed, the Chancellor’s open sentence was “Today is the day Britain steps back from the brink”.
The budget deficit (ie the difference between money coming in through taxes and money spent) in the last financial year (2009/10) was £155billion. So the UK’s debt has been growing in order to finance this gap with total debt expected to be around £900billion within a few years.
It is clear that this debt mountain is unsustainable, and so the Government either has to raise much more through taxes, or cut expenditure. Taxes have already been raised and may need to rise further. Indeed, the Chancellor’s comment that “a distributional analysis shows that those on highest incomes bear the greatest burden” suggests that there may be more tax rises on the way. It is clear, though, that after combining the impact of tax, benefits and public service spending changes, the highest quartile of earners will make the greatest contribution. However, even with significant tax rises the gap is still far too large, and therefore spending cuts are the only way to try and balance the books.
In making these cuts the Chancellor has had to be very mindful of the impact on the economy. Economists are divided over the impact the cuts could have on the UK’s recovery from recession. The Office for Budget Responsibility forecasts that the economy will grow by just 1.2% this year and by 2.3% in 2011.
The Government has made it clear that deficit reduction is at the heart of its economic policy, believing that the poor state of the public finances is a greater threat to economic recovery than the cuts in spending. Mr Osborne outlined three key principles underpinning his review; growth, fairness, and reform.
how much has spending been cut?
The Chancellor has set himself the target of cutting the deficit to zero by 2015/16. Eradicating this deficit requires spending cuts or tax rises of £81billion.
details of the cuts
The Chancellor’s speech contained a lot of detail, and there is far more in the associated press releases and various official documents. We are not going to try and repeat all of this here. Suffice to say that the proposals represent real and in some cases savage cuts. But some departments, notably education, come off far better than others, as the Chancellor also took the opportunity to redistribute funds between departments.
Close to my heart, of course, is HM Revenue and Customs. Here there are going to be cuts of some 15%, but, says the Chancellor, achieved through greater efficiencies and the use of enhanced technology. But despite the cuts, an extra £900million is being spent in tackling tax evasion, tax avoidance, fraud and debt with an estimated extra £7billion of tax being raised each year by 2014/15. We are also going to have to get used to “real-time” PAYE; if it works it will be great, but I am not crossing many fingers yet.
in conclusion
The Chancellor has had to make some tough choices. But that is his job. It is not for us to comment on the specific details. The Chancellor will have had his reasons, based on all the information he has, to make the cuts as he has done. We can say, though, that tough decisions have been made and we applaud the Government’s resolve in tackling this huge problem. Whilst today’s review was not a Pre-Budget Report (which we have previously been accustomed to at this time of year) there can be little doubt that today’s measures will be insufficient by themselves, and we can expect further tax rises for the better off in next year’s Budget.
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