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Coffee House

A long way to go

20 October 2010

5:52 PM

20 October 2010

5:52 PM

George Osborne has probably done enough to ensure that the public finances are back on
track and that the national debt will not run out of control.
 
He has, however, taken only the first step on the road to reducing the size of the state. The government will spend the same proportion of national income in 2015 as it did in 2007. In other words,
the size of the state will be no smaller when David Cameron goes to the country than when Gordon Brown left the Treasury.
 
Much more could have been done and low-hanging fruit has been left on the tree. Child benefit should have been scrapped for 16-19 year olds. Universal payments to pensioners (winter-fuel allowance,
free TV licences and free bus travel) and the aid budget have been left untouched or increased. Indeed, pensioners will enjoy the absurd “triple lock” that will see their real incomes
increase dramatically if there is deflation. These items should not have survived the review. There was easily room for £10bn more cuts to enable a significant reduction in
taxation. 
 
The promises of increases in spending made by George Osborne were very firm and specific whereas the spending cut pledges were rather vague. There remains the nagging question of whether the cuts
will be delivered. And will we see the desired increases in efficiency so that there are no cuts to the front line? We will have to wait and see. Sir Humphrey will do his best to make the cuts as
painful as possible and deliver few of the efficiency savings.
 
There were also few comforting messages on public service reform. The school funding system should be reformed so that all funding is directed through parents, thus cutting Sir Humphrey out of the
system altogether. Productivity in the NHS has plummeted, but the government wants to continue with broadly the same model. The government is also simultaneously preaching decentralisation, but
then it brings in special ring-fenced funds for cancer drugs, dementia treatments and so on.
 
Now that all is done and dusted, the government needs to turn its attention to radical supply side reform: a flat tax, abolition of the minimum wage and a significant reduction in regulation. Only
that way will the private sector thrive and restore our trend growth rate. I see precious little evidence that this will happen. Osborne’s chilling remark: “Our aim will be to extract
the maximum sustainable tax revenues from financial services” shows that the Treasury does not understand that all such taxes are ultimately paid by savers (potential pensioners) and the
users of financial services (you and me). I want the Treasury to take the minimum revenue necessary from all sectors of the economy.

Philip Booth is the Editorial and Programme Director at the Institute of Economic Affairs
 

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