Cutting spending needn’t be taxing

Today we will learn the full list of reducitons in spending to take this year’s total down by £6 billion. This is a most welcome development, because for the first time the UK government will be acknowledging the problem of the collosal deficit needs tackling immediately. For the first time in years a government will announce a whole package of reductions, trying to change the trend.

The government and most of the commentators also know that £6 billion is nothing like enough to deal with the problem. It is an early downpayment, a signal of intent, the aperitif before the main meal.

We are told that the Business Department will have to find a substantial proportion of the total. That is a good idea. The business lobbies have rightly demanded cuts in spending for some time. Sensible businesses want low taxes and internationally sensible levels of regulation. They do not need government grants and government guidance.

The Business Department has one of the smaller budgets – around £22.5 billion this year including capital spending. There are two elements of this spending that should be singled out for substantial reductions.

The first is the payment of grants to businesses. When I was a DTI Minister, always sceptical of the wisdom of paying grants to companies, I was pleased to find many letters coming in from companies in competition with grant recipients complaining that their competitor was getting special treatment. The complaints were particuarly vociferous about EU grants to European competitors.

The second is the quango empire centred around the RDAs. Central and local government has substantial involvement in business through planning, transport and a wide range of regulation. We do not need another layer of administration and intervention through these unelected bodies. What needs doing can best be done by Whitehall or Town Hall, at no extra cost.

The government should also pursue the waste of public money at the EU level, where we need a budget sharply lower than last year’s , not higher.

In opposition Mr cable proposed the abolition of the whole Business Department – before it was also responsible for Higher Education. That should make it possible for him to find billions rather than hundreds of millions of cuts from his departmental inheritance. These are the easy cuts, so let’s make them large enough to have some impact.

It will be later this year that the government goes on to tackle the huge benefits budget, the one where we need to make big inroads by getting people into work.

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29 Comments

  1. Mike Stallard
    Posted May 24, 2010 at 8:29 am | Permalink

    What with the EU juggernaut trundling along to crush our economy under the weight of the Club Med countries, it is vital that as many cuts are made as soon as possible.
    Six billion is a good start. Wasn't the business department invented so that Lord Mandelson of Foy could some back from the EU and support Gordon when the Lisbon Treaty was going through? If so, why is it still there, costing about half what we spend on our entire defence budget?
    The future is now looking even more bleak: I wonder if Mr Cameron will be able to stop us pouring hundreds of billions (yes) into Europe though so that Mrs Merkel can get re elected.

  2. Norman
    Posted May 24, 2010 at 8:37 am | Permalink

    It will be interesting to see how and where the big cuts needed are going to be made later in the year. Defence is already pared close to the bone, every government since the beginning of time has wanted to make 'efficiency savings' – none suceed in any great measure, education is vital if we want to compete so you can take them out of the equation.

    The huge budget (welfare) has a very large chunk ringfenced (NHS) and there are other parts that it isn't practical to cut (e.g. pensions – in fact with an aging population and people living longer this will grow in the medium term until the retirement age is significantly raised). Getting people who choose benefits as a way of life to change their ways and make them want to work is easier said than done – after all they are the reason we have so much immigration, as they're not willing to work so we must import people who are. Unless that was a lie?

    Ringfencing the NHS was a monumental blunder made in the days of sunshine and light when boom and bust had been relegated to the history books and then couldn't be repealed for fear of bad headlines. Other departments will be disproportionately cut because of this and there is absolutely no doubt that front line services will have to carry some of the burden because of this (assuming that the necessary cuts will be made).

  3. Brian Tomkinson
    Posted May 24, 2010 at 10:01 am | Permalink

    I enjoyed your interview with Andrew Neil on 'Straight Talk' this weekend. I hope your wise words are taken note of by your colleagues in government.

    • gac
      Posted May 24, 2010 at 8:21 pm | Permalink

      I agree, great interview.

      Pity it the advice offered may be ingnored.

  4. DennisA
    Posted May 24, 2010 at 10:23 am | Permalink

    It is interesting that DFID are to increase their spend on "Global Environmental Funds" by £142 million to £286 million in 2010-11, almost doubling their 2009 figure of £144 million. There is no breakdown of that. They also are spending £34million on a "Global Transparency Fund" but it isn't clear what that is either.

    Of course, their budget is ring fenced isn't it?
    http://www.dfid.gov.uk/Documents/publications1/de

    "The UK is strongly committed to working through the multilateral system. Many global challenges can only be addressed through a collective international response – for example, climate change mitigation. DFID spent 41% of its programme budget on central funding of multilateral organisations in 2008/09. In addition 29% of DFID’s bilateral programme was channelled through multilateral organisations in 2008/09."

    To help developing countries effectively tackle climate change and poverty, a joint DFID/Department for Energy and Climate Change (DECC) programme will provide £800 million over three years to the Climate Investment Funds (CIFs). In 2008/09 DFID contributed half the initial instalment of £100 million."

    Why is all this regarded as sacrosanct? Why is the detail not being examined?

    • Acorn
      Posted May 24, 2010 at 5:51 pm | Permalink

      And how much of that money will end up in Swiss bank accounts?

  5. Lola
    Posted May 24, 2010 at 11:07 am | Permalink

    Why the Hell do we need a 'business department' at all? Just shut it down. All of it. Now.

  6. Posted May 24, 2010 at 11:17 am | Permalink

    The first campain to out an MP has started with the gathering of signatures to remove the MP for Bracknell for not responding about disabled children. A Doctor who doesn't think disabled children matter.

    100 Signatures and building – Website to be launched and the first head to be removed soon.

  7. gac
    Posted May 24, 2010 at 11:44 am | Permalink

    Why is Overseas Aid (International Development) ring fenced?

    It appears to be a huge waste of money – given to Countries which keep their citizens poor in order to qualify for more hand-outs?

    And shouldn't Africa be awash with water given the number of water wells the World (and us) has paid for over the last 50 years or so? and on the same note their children the best educated also?

    Stop paying our membership fee to the EU on the basis that our balance of trade deficit of c £50bn a year is cost enough!

    There- easy- £20bn saved at two strokes of the brush.

    Now, if only I could get my expense claims sorted………….

  8. Ex Liverpool rioter
    Posted May 24, 2010 at 12:22 pm | Permalink

    I just watched “Ozzy” on TV,….. Cuts……….You call those cuts!

    John, he is a “WET” !

    Why didn’t we just re-elect Gordon, or Fidel Castro!

    Great, just Great another “Heath” pink Tory goverment!

    You be out in 6 months!
    Mike

    • APL
      Posted May 24, 2010 at 5:23 pm | Permalink

      Ex Liverpool rioter: "Great, just Great another “Heath” pink Tory goverment!"

      Yes, as advertised.

      Ex Liverpool rioter: "Mike"

      Careful, I don't think there is a statute of limitations on rioting. 🙂

      • Ex Liverpool rioter
        Posted May 25, 2010 at 1:12 am | Permalink

        I was 17, 46 now!
        I don't think the police will find me………after all they didn't find my car when i was carjacked 5 years ago……in fact they refused to even come out to me!

        Mike

  9. paul a
    Posted May 24, 2010 at 12:48 pm | Permalink

    As a business owner I totally agree with you John. I am also NOT a fan of Businesslink either. I think that Chambers of Commerce, Federation of Small Business and the IOD all do a far better job than Businesslink and at zero cost to the taxpayer.

    I'm also dubious about the return on investment from the various Locate in X or X Future and other quasi local/regional "business" promotion agencies

  10. JohnRS
    Posted May 24, 2010 at 1:07 pm | Permalink

    George's £6Bn "cuts" are less than 1% of overall government spending. This is not even at noise level yet, it's more like a rounding error.

    When are we going to get the real cuts that are needed?

  11. Jamess
    Posted May 24, 2010 at 5:00 pm | Permalink

    Here's an idea to bring about a large reduction in spending:

    Let every MP search for areas of government spending that can be reduced. Any MP who identifies such savings can allocate 10% of the saving and spend it on any area of government that he or she wishes. (This could be for a constituency hospital, better equipment for the armed forces etc).

    This will mean that every MP will be actively searching for savings – knowing that the first to find uneccesary expenses will be able to use part of that money to support a project he/she (or his/her constituency) is dedicated to.

    It will also help the public see that savings/cuts in one area are necessary to support spending elsewhere, and thus make start the process of educating people on economic realities.

    Of course it could mean uneccessary spending on some pet projects, but at most it will only be 10% of what was originally wasted.

    • Andy B
      Posted May 24, 2010 at 11:44 pm | Permalink

      This sounds more like educating the MP's as to what they should already be doing!

      If they are working in the best interests of the country then they shouldn't need incentives to save even one pound – we elect these people (or in the case of the most recent showing, we DON'T elect them, they just get there by default) in order to act in our best interests.

      Our best interests at the current time are best served by reducing our debt ASAP.

      If we need to give them the equivalent of a bag of sweets (on top of their handsome salaries) to go to work on this then god help us.

      It is not the government's job to "educate the people" but it IS their job to lead by example.

  12. shaun
    Posted May 24, 2010 at 6:00 pm | Permalink

    ihave no problem scrapping the RDA's but we need to put soem serious transparency measures in place at councils before we hand them these new powers also new rule s such as not been able to use public money for politcal purposes and make them feel the full wrath of the audit office every year with the report fullaccessible on line with in weeks of the council been auditied. there is a danger that with new powers some councils may return to the bad old days where instead of been a council they see themselves as some sort of shadow government.

  13. StevenL
    Posted May 24, 2010 at 6:19 pm | Permalink

    "The first is the payment of grants to businesses. When I was a DTI Minister, always sceptical of the wisdom of paying grants to companies…" (JR)

    But isn't it the case that multi-nationals (car manufacturers for example) effectively play governments off against each other for these subsidies in return for job creation?

    Surely without getting everyone in Europe to stop doing it (and the EU itself which I've heard has a very generous streak where the likes of Mercedes are concerned) we'd just be shooting ourselves in the foot?

  14. Ian Pennell
    Posted May 24, 2010 at 6:23 pm | Permalink

    FROM: Ian Pennell

    24th May 2010

    Dear John Redwood

    SIR, perhaps the scale of the debts we as a country have been left with has been underestimated. Not only is there the huge £160 billion Budget Deficit to be paid down (thankfully it is a little less than hitherto feared) but there are unfunded Public Pension liabilities, Private Finance Initiative and Public Private Partnership liabilities, which actually means there is something in excess of £200 billion in the shortfall of tax revenues vis-a-vis expenditure. The total amount of debt (as opposed to Budget Deficits in this country is likely to be somewhere north of £ 3 trillion, the un funded Public Sector Pension liabilities is already close to £1 trillion alone).

    The implications are that, within a short time period (probably three to four years) the fiscal adjustment the British Government must make will be about £200 billion, and most of this will have to come through spending cuts. The following measures WILL be able to achieve most of this fiscal adjustment without meaning real cuts to frontline services:

    1) According to the Bumper Book of Government Waste, written in 2008 by Matthew Elliott £100 billion spent by the government is spent on quangos, bureaucrats, inefficient IT systems and red tape, among other things and it does not go directly to the frontline Public Services. By cutting all this unnecessary waste and halving the size of quangos (with recruitment freezes and voluntary redundancies) £100 billion could be made available.

    2) Scrapping further PFI/PPP programs such as Building Schools For The Future, cutting the cost to the Public Sector of procurement of goods and services by 20% (by haggling and being tougher with suppliers), imposing a wage freeze on Public Sector workers earning over £20,000 for two years and making all Public Sector workers on over £30,000 a year contribute 10% of THEIR OWN SALARIES to the Public Sector Pension Pot should raise a further £50 billion.

    3) In the event that the economy stagnates over the next few years the Public Sector pay freeze for all those workers on over £20,000 will need extending for two more years, benefits such as Jobseekers Allowance and Income Support will need to be frozen and all Public Sector Workers on over £40,000 a year gross should be made to accept a PAY CUT of 10%. Tax Credits will have to be axed for all families on over £20,000. This should then raise a further £50 billion bringing the total fiscal adjustment to £200 billion by 2014/5.

    These measures would be extremely unpopular, but they will probably be necessary to avert a Gilts Strike and a collapsing currency (as internayional investors think Britain is a credit risk) and a situation arising where we cannot repay the businesses involved in existing PFI/PPP Schemes.

    The scale of the cuts needed Sir, would tip Britain back inrto recession if we just focused on cutting spending at this rate, so it is important that whilst the severe fiscal adjustments are being made interest rates at the Bank of England are kept close to the floor (yes, it means savers will have a thin time of it for a few years but that is better than recession and thousands of job losses) and it is important that taxes on businesses and on the wealth-creating parts of the economy are reduced. The top rate of income tax must come right down, perhaps to 35% and Corporation Tax must be cut. These tax cuts can be funded by higher taxes on consumption, a new Luxury Levy should be introduced (which would be like a VAT for the rich)- 50% of the value of yachts, mansions, limousines, antiques. That would be much more socially progressive than slapping up VAT to 25%!

    The lower business taxes and very low interest rates should enable the British economy to cope with a fiscal adjustment of £200 billion over four years. It is probable indeed that the economy would continue growing, which would provide extra tax revenues. That would mean that all the very unpleasant spending cuts grouped above under (3) could (and should) be avoided.

    A new Robin Hood Tax on bank to bank transactions (0.1% of these transactions) and a tax on bank bonuses would raise about £30 billion, enough to fund those things that more money needs to be spent on such as more nuclear power stations (so the lights dont go out!), improving the NHS and repairing our pothole-infested country roads. The full electrification of Britain’s rail network is also long overdue. We also need a lot more Police on the streets (higher taxes on alcohol should pay for it) to make our inner cities safe to walk in after dark. Those are areas where not enough has been spent properly under Labour.

    The Liberal Democrats will have to bury their differences and accept the need for an income tax cut on high earners (even whilst severe cuts are being made); try and get Sir Vince Cable and Nick Clegg to understand what a Laffer Curve is and of the implications for not agreeing to actually push through measures which will be needed to prevent a) a return to recession, b) a Gilts Strike with the country going bust or (most likely) c) both recession and the country going bust! Explain to the Liberal Democrats that we can still make the tax system more socially progressive by taxing the rich by having a Luxury Levy whilst substantially cutting marginal rates of income tax and corporation tax.

    The Liberals also need to be sensible about Energy Policy, windfarms and tidal power won’t stop the lights going out as the full implications of Peak Oil start to hit home. If the lights go out in Britain circa 2014 the Conservatives will be out of power for a very long time! The European Union is another serious threat to our future sovereignty and prosperity, the taxes they want to levy on Britain, the regulations they want to impose on British industry could send us back into recession. Indeed the latest Directive, restricting the activities of Hedge Funds and Alternative Investment operations will seriously damage our economy if we allow Europe to bully us into slavishly gold-plating it!

    I do hope that our new Prime Minister can make the Liberals understand that Europe is more harmful than beneficial to Britain, all things considered (yes, we have access to the European marketplace but we pay for that through regulations that are estimated to cost our economy almost £100 billion a year and we are NOT ALLOWED to cut VAT below 15%. How many other taxes can we not cut below certain limits whilst part of the European Union?!

    Cutting taxes helps economies, I’d say get out of Europe and re-negotiate a new arrangement with them (like Norway and Switzerland have); we as a country could cut certain taxes completely if we wanted to and we would be able to trade (on more favourable terms) with countries outside the EU. Our economy would grow strongly and would generate the tax revenues (despite lower tax rates) that could fund the best Public Services in the World and we could give the poorest and most vulnerable in society much more money and assistance than is possible at present! How is it that people running this country hitherto fail to understand some of these facts? Could it be something to do with vested interests with the EU Gravy Train?

    I trust, Sir that you will be able to make your influence felt in the new Coalition, even though you are not in the Cabinet. We might have a Conservative Government (of sorts) but there are too many Left-leaning people (with a Socialist ideology) in that Cabinet for my liking; perhaps you could make them see sense!

    Yours, etc

    Ian Pennell

  15. Javelin
    Posted May 24, 2010 at 6:48 pm | Permalink

    £6 billion is an insignificant sum (<5% of the £150bn borrowing) and doesn't even cover the excess spending since the general election.

    I cannot see the current Government holding out until the budget to implement more cuts. In 6 months time we will be another £75 billion in debt.

    If the general public had a real grasp of the huge mind numbingly self gratifying wreckessness of Labours political overspend they would be demanding £6 billion cuts every fortnight right up until the election – when George Osborne should start to cut into the £1000 billion pound debt that needs to be cleared. At the current rate, including interest we need to keep cutting £6 billion every fortnight for 10 years just to get back to an even keel.

    Let's hope business recovers and taxes rise to reduce this.

    Can we avoid a double dip recession – it will be a miracle if we don't.

    • Javelin
      Posted May 25, 2010 at 10:23 am | Permalink

      I put a spreadsheet together for a presentation this afternoon entitiled "Tax and Spending".

      The easy bit was to seperate the cashflow and capital spending and to figure out how much needed to be cut given a 20% rise in VAT and growth at the predicted levels. The difficult bit was to believe there is the political will to make the necessary drops to our standard of living to accept these cuts.

      Something deeper will have to change – whether its charging for the NHS, increasing income tax, cutting public sector pensions, severely reducing benefits for the able bodied etc. I think some sacred cows are going to need to be sacrified.

      The bit that I think is troubling is that I also think that the markets will need to see a sacred cow sacrified before the autumn – when I think the markets will turn their FULL focus on the UK. But I don't think the politicans will do this because they have an inflexible timetable of a summer and winter budget – and don't want to be seen to be cutting to the bone before they absolutely have to.

      Shorting sterling rose sharply this week and I think that a lot of traders are begining to get the feeling that this Government will not make the cuts necessary to stave off a serious drop in growth. I do program trading and when I speak to the strategists they are umming and arerring and feeling very uneasy about things. I don't think this feeling is being numerated yet – but traders are begining to get a feeling for the scale of the cuts and the rate of the cuts and suspecting that politicans aren't up to it. (which has reminded me of Merv Kings statements).

  16. Acorn
    Posted May 24, 2010 at 7:14 pm | Permalink

    Year two have just scripted the first page of their economic thesis for the Governors.

    Unfortunately, the teachers don't understand the first thing about Austrian school economics. Teachers are by nature Guardian readers who never left school; they were injected with Keynesian-ism at socialist teacher school. We tried to expose the duff teachers with SAT tests – SATs were introduced to expose duff teachers, not duff children. (In-service competence tests).

    Anyway page one of the thesis looks like this:-

    GDP (market prices) = 1400 billion; (should be 1240 factor cost, but that's another story)
    Government spend = 704 billion = 50.2 % of GDP
    Government income = 547 billion = 39 % of GDP
    Government current deficit = 157 billion = 11.2 % of GDP
    Government debt (not including future liabilities) = 800 billion = 57 % of GDP

    "Now year two, your chair of governors, requires you to remove 6 billion from the government spend line and recalculate. Show your working"

    Then answer the following questions:-

    "How much more do we have to remove from the government spend line, to keep the government debt line at 800 billion?"

    "If we wanted to reduce the government current deficit line to 3 % of GDP; how much would we have to remove from the government spend line". How would this affect the government Debt line number?"

    "Repeat the above two question assuming that the GDP line number increases by 2 % per year for the next five years. What would the government debt line number be, when you are in year seven?"

    It is not acceptable to increase the government income line number by more than the current 39 % of GDP. Extra marks will be given for good ideas that reduce this percentage number.

  17. Bill
    Posted May 24, 2010 at 7:18 pm | Permalink

    As finance director in the operation we took an MBO company manufacturing capital equipment from £7m to £110m, sales in 10 years through organic growth and acquisition, and a flotation, without any grants.

    Now capital equipment manufacturers are very heavy users of working capital, big stocks and a lot of wip as it took three months to complete a machine.

    In the first year after the MBO I spent a lot of valuable time seeking this “free money” unsuccessfully.

    I found the applications tedious, if I recall correctly, balancing job creation with capital equipment purchase, and the two having to go together…. Often we were spending funds on CNC equipment to dispense with jobs.

    Grants provided a job creation scheme for all manner of consultants rowing past the door, who “knew how the DTI worked” and could for a big fee maximise the grant. The auditors always tried to sell their grants team. Invariably the business plan that I had wouldn’t provide a basis for a grant so I ended up having to do variations of the plan, these variations weren’t routes that we wanted to pursue, just to try and hook a grant.

    After I threw the grant option out of the window I started to look at the real options to manage cash flow

    Seeking down payments from customers to offset WC costs

    Improving production control to keep the stock levels down, not buying, or machining components too early

    Revaluing the property to get bigger bank lending facilities

    Cutting down, as far as possible, on performance bonds as they impact upon the bank facility £ for £

    Concentrating on the spares business as it provided quicker cash return, shorter lead times.

    When you’re spending hours going over grant applications you can overlook the obvious other remedies to take.

    The grants industry seemed to me, by impression I have no evidence, as “jobs for the lads.” Get in close with the local DTI, join this body and that body and you got a preference, as there was a big discretionary element.

    I watched some grants given out to projects that had no hope, based upon a a comic of a business plan and then went under.

    Ditch the grants, if all else fails try to get venture capital on board.

    If there is any spare money about spent it on the troops in Afghanistan not on handouts to business.

  18. Richard Taylor
    Posted May 24, 2010 at 8:33 pm | Permalink

    I left the business sector and worked for the economic development department of a local borough authority for five years – now I'm back in the private sector. Working in local gov, I thought I could real help the council develop the local economy – but we had little to offer. All we seemed to do was dream up aspirational statements about inward investment, building advanced skills, and high-tech knowledge economies – it just went on and on – in some parallel universe to the real world of business. Despite the best will, fantastic strategies, consultation, etc at all levels – I generally thought it was a waste of time and money – but careful not to expose this to others who didn't see it any other way other than saving the world. The business sector largely prevails and I'm glad the conservatives have seen sense and stopped the wasteful RDA strategies and wishful thinking. And as a footnote – do you remember SEEDA's Chief Executive (Jim Braithwaite), proudly justifying his £50k pa driver expenses – and it was just a part-time job!

  19. Leslie
    Posted May 24, 2010 at 9:13 pm | Permalink

    Now that the Government has cut the £6Billion as promised from the budget, can we now asume that Gordon Brown's forecast of a disaster and return to recession is inevitable?

    We should all take Brown's words and offer them back to him as we hold his feet to the fire for the incompetant job he did as Prime Minister and previously as Chancellor.

    However, Mr Cameron needs to stop promising one thing and doing another. Maurice Satchi had it right today. Dave needs one "Big Idea" and needs to make it stick. How about putting the "Great" back into "Britain.?

  20. C Hayward
    Posted May 24, 2010 at 9:22 pm | Permalink

    The Conservatives could point out that many of Labour's additional Public Sector jobs were a cruel delusion perpetrated on the recipients because they were unsustainable to fund and had job content that was never going to be part of core Govt work. Hence they would always be vulnerable in any financial review and the Govt knew this when they created them to enhance the client state. As a result many worthy and hard working people will lose their jobs – victims of Labours cynicism and machination.

  21. BillyB
    Posted May 25, 2010 at 12:45 am | Permalink

    Why does no-one dare mention the size of the total National Debt? The "deficit" is the amount the government are increasing it by each year innit? Surely we'll need a surplus to even start paying down the total debt.

    • Acorn
      Posted May 26, 2010 at 6:27 pm | Permalink

      BillyB. UK government’s “primary balance” is minus 9% of GDP, according to BIS; about £120 billion DEFICIT. (Primary balance = government spend – debt interest payments – government income; circa 704 – 43 – 541).

      According to BIS we need a budget SURPLUS of 5.8% of GDP to stabilise the debt, over ten years, at the level we had in 2007. So we have to remove the deficit of £120 billion and a further £77 billion, from the government spend. The 77 billion pays the interest on our debt of 43 billion leaving 34 billion to start paying down the debt, back to 2007 level, in ten years.

  22. Ex Liverpool rioter
    Posted May 25, 2010 at 1:13 am | Permalink

    John
    Spain is imploding:- http://www.businessinsider.com/guide-to-the-spani

    Just look at those charts!

    BTW Look @ the front page of the "Inderpendant"

    Mike

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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