There’s an overwhelming ‘thumbs-down’ on the government’s plans for cutting the cost of government. They are totally inadequate and show why investors are hanging on to the prospects of a Tory government as our only hope - and that’s a slim one too!

Christina
================================
TELEGRAPH 8.12.09
1. Pre-Budget report: City slams Gordon Brown's measures on public finances
The City has derided Gordon Brown’s latest drive for Whitehall efficiency as too little, too late to arrest the crisis in Britain’s public finances.
By Edmund Conway

Although experts and lobby groups said the Prime Minister was right to try to clamp down on public sector waste, they said that his promise to save £12bn over three years through a new package of efficiency measures was unconvincing.

Mr Brown said that he would use a number of streamlining techniques, including “naming and shaming” overpaid public sector workers and putting crime maps and school reports online in order to cut overheads.

The plans are being framed as an extension of the Gershon round of spending cuts which were first implemented four years ago.

The Government has promised to halve the budget deficit within four years, but even this pledge, which will be enshrined in the fiscal responsibility bill, is less ambitious than plans already laid out in the Budget earlier this year.

John Cridland, deputy director-general of business lobby group the CBI said: “This is the right direction of travel but the Government needs to be bolder. A number of the measures announced to streamline government by cutting waste and duplication have already been proposed by the CBI.
“Much bigger sums could be saved through radical reform of the way public services are delivered.”

However, Michael Saunders, chief European economist at Citigroup, said that there was scant evidence that efficiency cuts such as these would make a palpable difference in tackling the scale of the deficit.
“It is hard not to conclude that this is merely a political smokescreen,” he said. “We heard all of this four years ago [in the Gershon review], but there was no evidence from the bottom line that it made a difference, either to public spending levels or to productivity.
“This gives me no encouragement at all about the state of the public finances. Furthermore, the amount to be saved is very small in comparison with the total scale of the deficit.”

Indeed, the Treasury expects to borrow slightly more than £175bn this year alone.

Mr Saunders said: “You have to focus on either raising taxes or cutting aggregate public spending and produce a plan for getting the deficit down. The situation for the UK is too risky to avoid that.”

The Treasury report, Putting The Frontline First, focuses both on the expense of the most senior civil servants and on cutting costs by more widespread use of computers and online technology.

It pledged to cut Government spending on consultants by half and communication spending by a quarter and to relocate more Civil Service staff away from London.

The Conservatives’ shadow Chief Secretary to the Treasury, Philip Hammond, said: “Labour have had repeated efficiency drives over the last 12 years which have identified billions of pounds of potential savings. Yet they have only achieved a fraction of the savings claimed.
“Efficiency reviews are not the problem – Labour is. Waste and inefficiency remain endemic after 12 years of Labour government.



2. Pre-Budget report: PM's spending assault fails to cut the mustard

By Jeremy Warner

Few political promises are more meaningless than that of waste elimination in public spending. Yet it doesn’t seem to stop politicians from constantly pretending that front line spending can somehow be kept intact by simply getting to grips with government bureaucracy and excess.

Gordon Brown was at it again yesterday with the launch of a new policy document which claims to have identified £12bn of “back office” cuts ripe for application to front line services.

Admittedly, some of these savings look achievable. It shouldn’t be difficult to reduce spending on outside consultancy by a half and even easier to slash “marketing spend” by a quarter. The mystery is how these expenditures were ever allowed in the first place. And it has to be assumed the Prime Minister is serious about reducing the pay of top public servants and axing the new NHS IT system.

Yet this is all chicken feed when compared to what’s planned for public spending as a whole over the next four to eight years, even under the Government’s own proposals, let alone those of the Conservatives. Duplicitously, Mr Brown always manages to forget this wider agenda of enforced spending cuts.

The last serious attempt to address waste in Government was the Sir Peter Gershon review in 2004, which identified £21.5bn of savings. The Government claims to have delivered even more – believe it if you will – but as we all know, public spending as a whole has risen dramatically since then, and with it inefficiency. It’s difficult enough to control waste even in private sector organisations but in government, which lacks the discipline of the bottom line, it’s virtually impossible; like Hydra, if it is cut back in one place, it simply grows up in another.

Mr Brown is proud of what he has achieved for public services. In his speech yesterday, he called it a “second generation” of investment. The once-ambitious goals Labour had set for itself had now become the accepted norm, he said – 42,000 more teachers since 1997, 89,000 more nurses, 44,000 new doctors, and so on. What he failed to answer is how all this ongoing expenditure is going to be paid for.

Forget windfall taxes on bank profits and bonuses. Assuming an effective way of taxing banking windfalls can be found, the sums involved will be of little or no long-term fiscal significance given the scale of the public debt overhang.

I say “no significance” but, of course, by further increasing the complexity, burden and unpredictability of the British tax system, windfall taxes only add to the country’s growing lack of competitiveness. Companies, intellectual property rights and employees have never been more mobile; the less friendly the environment for business, the more the tax base will dwindle.

Politically, taxing the bankers may or may not be helpful to Brown’s beleaguered Government; certainly, it ought to play well with the redundant workers of Corus and beyond. But economically, it’s madness.


As yet, the total tax burden in the UK is still roughly in line with the rest of Northern Europe. Indeed, at a little under 40pc of economic output, it is some way below the Nordic countries and other high tax European economies such as France. Yet it is already a third higher than the US. More significantly still, the UK tax burden has been rising strongly in recent years, while in some other advanced economies, notably Germany, it has been falling.

Britain’s comparative tax advantage has already been eroded to destruction, and it can only get worse. Under Treasury plans for fiscal consolidation, this upward trend in the tax burden will accelerate further.

Around a fifth of the fiscal squeeze pencilled in for the four years to 2013/14 is scheduled to come from tax rises — notably from higher fuel duties, enhanced national insurance payments and the new 50pc income tax band.

This proportion may be lifted further still by whatever “soak the rich” initiatives are unveiled in tomorrow’s pre-Budget report but the Chancellor must know how perilously close his tax plans are to being self-defeating.

The Nordic countries are a law unto themselves but for open, entrepot economies such as Britain, a tax burden any higher than it already is could well be incompatible with growth and future job creation. The law of diminishing returns is about to kick in.

So the heavy lifting, or some 80pc of the planned fiscal squeeze, has to come from cuts in public spending. That’s an awful lot of cutting that the next government has to do. This is not, by the way, my own conjecture. It’s down there in black and white in the present Government’s published plans, and it is as incompatible with continued political ambition for public services as higher taxes are with future growth.

According to the Institute for Fiscal Studies, current plans for departmental spending cuts would imply that three quarters of the increase in spending as a proportion of GDP under Labour will be reversed over the next four years. And this takes the country only half way to the goal of balanced budgets. If just 50pc of the subsequent squeeze is achieved through spending cuts, with the rest coming from tax rises, the whole of Labour’s public spending experiment would be wiped out with scarcely a mark left in the sand. I exaggerate only a little. There are lots of new hospitals and schools as a lasting legacy but we will be overpaying for those under the private finance initiative for decades into the future.

The Treasury may be wrong in its projections. The permanent loss of output may not be as bad as assumed and, as a consequence, the fiscal squeeze may not have to be as bad. Yet, worryingly, the risks of downside disappointment look just as big as for upside surprises. Any increase in interest rate would considerably add to the costs of servicing the public debt mountain and therefore require even deeper spending cuts.

A future government could also seek to address the problem by attacking benefit payments rather than slashing departmental spending. This is going to have to happen at some stage anyway to deal with the upward pressure on spending from demographic factors.

Either way, the big point is that, despite 13 years in the saddle, Gordon Brown has not been able to lift public spending on to a sustainably higher footing. Indeed, he’s virtually bankrupted the country trying.

If you can neither tax nor borrow your way to oblivion, your only option is to spend less. Regrettably, this is not going to be achieved through cutting back on public sector excess, which is the fiscal equivalent of merely swapping your drinking habits from champagne to Prosecco.