Thank you to Tulip, and to all of you for coming here today.
The RSA was established in 1754 by William Shipley to debate the big issues and choices facing the future of our country.
So with 59 days to go until what is set to be both the most closely fought and the most important general election of my lifetime, what better venue to talk today about the choices we face as a country?
Because be in no doubt, this election will have a decisive impact on the future direction that our country will take.
Will Britain remain in Europe, both as an open, global trading nation and a full member of the European Union and the single market, currently our number one trading partner?
Will we make the reforms necessary so that our economy both grows and delivers rising living standards for working people?
And can we stop the current and continuing rise in our national debt and balance the books in the next Parliament without putting at risk vital public services upon which both businesses and citizens depend?
Questions where the parties fighting the election will sometimes disagree on the ends and certainly disagree profoundly on the means.
And challenges which are, of course, closely inter-related.
Because who can doubt that the rise of the UK Independence Party and anti-European sentiment reflects, in part, a frustration borne out of the current and continuing squeeze on living standards?
Today I want to talk about another vital election issue – how to strike the right balance between balancing the books and the future financing of our public services, given the close relationship between slow productivity, the living standards squeeze and deficit reduction.
In recent months, Ed Miliband and I have set out Labour’s tough but balanced plan on the public finances.
We will cut the deficit every year, get the current budget into surplus and the national debt falling as soon as possible in the next Parliament.
In our manifesto there will be no proposals for any new spending paid for by additional borrowing – because we will not make promises we cannot keep and cannot afford.
And we will balance the books in a fairer way – through sensible spending cuts which our Zero-Based Review continues to identify, fairer choices on tax and an economic plan that delivers the rising living standards needed to boost tax revenues and protect vital public services.
In contrast, the Chancellor announced plans in last year’s Budget – re-confirmed in the Autumn Statement – which go way beyond balancing the books and aim for an overall budget surplus of £23 billion by 2019/20.
And to deliver this goal, the Chancellor set out tax and spending plans in that Autumn Statement – the defining fiscal moment of this Parliament – which aim to take public spending back to 35 per cent of GDP.
This is a share of national income last seen in the 1930s according to the Office for Budget Responsibility – a time before there was an NHS.
Today I am going to set out why the Chancellor ended up in this place and the implications of those plans for our public services and working people across Britain.
First, the backdrop to that Autumn Statement moment.
In 2010, the Prime Minister made two key promises on the economy.
He promised there would be sustained rises in living standards.
And he pledged to balance the books in five years’ time.
Five years on it is clear that neither of those pledges have been met.
And their failure is inextricably linked.
After five years of this government working people are worse off.
As the Institute for Fiscal Studies confirmed last week, household incomes are down compared to 2010 when this government came to office.
Wages after inflation are down by more than £1,600 a year since 2010.
Households have lost £1,127 a year on average as a result of tax and benefit changes introduced by this government.
And the result is that this is set to be the first time since the 1920s that people are worse off at the end of the Parliament than they were at the beginning.
At this election, the answer to the famous Reagan question – ‘Are you better off than you were five years ago?’ – is a clear and resounding no.
Yes, our economy finally started to grow again in 2013 and officially-recorded employment figures have grown much faster than expected.
But this recovery has been characterised both by weak export growth, sluggish business investment and stagnant productivity growth and also by the enormous rise in the use of zero-hours contracts and other forms of part-time work, which reduce the unemployment figures but also help explain why wage growth has remained so weak.
All this explains too why, when asked whether they see economic recovery, most people in our country reply – yes, there may be a recovery but it is not a recovery which is working for me or my family or our community.
And this failure on productivity and living standards has led to this government’s failure on the deficit.
In this Parliament, weak earnings growth has led to tax receipts falling short.
National Insurance contributions in this Parliament have been £27 billion less than planned, while income tax revenues have fallen short by £68 billion.
This is the key reason why, far from balancing the books, borrowing is set to be £76 billion next year.
And why the government is now set to have borrowed a staggering £200 billion more than they planned in 2010.
But what was so significant about the Autumn Statement was the decision of the OBR to revise down its forecasts for tax revenues well into the next Parliament too.
As they said in December:
“We expect earnings growth to remain subdued for longer than in March. This is the key driver in the lower forecast for PAYE and NIC receipts.”
And in Table 4.10 they set out their forecast of £8.2 billion lower income tax and National Insurance receipts compared to the Budget forecast in 2016, £11.4 billion in 2017, £13.6 billion in 2018 and £15.2 billion in 2019.
Of course, while this information was announced to Parliament on 3 December, the Chancellor will have had these new and disappointing forecasts a week or two earlier.
And, while the OBR produced the forecasts, it is the Chancellor who makes the fiscal judgements.
This would have been deeply unwelcome news, a confirmation that the cost of living squeeze had thrown his fiscal plans badly off course well into the future.
But the Chancellor had a choice.
To accept reality and set out a steadier pace of deficit reduction.
To stick to his fiscal objective of an overall budget surplus and the already deep spending cuts he had set out for the next Parliament at the time of the last Budget, and seek to make up the shortfall through action to secure stronger revenue growth – by tackling tax avoidance, asking those at the very top to make a greater contribution or action to boost wages and living standards.
Or to stick to his fiscal objective of a big surplus and drive through even deeper spending cuts.
This was a genuine strategic choice. A political choice.
And the Chancellor chose the latter course:
Not only to stick doggedly to his fiscal goals, but dogmatically to seek to fill the gap caused by these lower forecasts for tax revenues entirely through even deeper spending cuts than he previously had planned.
Spending cuts which the Institute for Fiscal Studies said the day after the Autumn Statement were ‘colossal’ and suggested could require ‘a fundamental reimagining of the role of the state’.
Spending cuts which the Chairman of the OBR has said were based on policy assumptions signed off by ‘The Quad’, and therefore include the Liberal Democrats too – and which would lead to public spending as a share of GDP returning to a share of GDP last seen in the 1930s.
Of course, since the Autumn Statement the Conservatives have tried disingenuously to claim that the spending cuts they are planning for the next Parliament are not as deep or extreme as they really are.
The Prime Minister continues to claim that his plans are “reasonable, responsible and sensible”.
And a rattled George Osborne even lashed out at the BBC for reporting that the OBR had said the public spending share is projected, on his plans, to return to the level of the 1930s.
But whatever the Government’s obfuscation and diversionary tactics, it is important we get to the truth.
Because understanding the future path of public spending under the Government’s current plans is vital to:
- the credibility of their deficit reduction strategy;
- to the public services upon which people and businesses rely; and
- to the real election choice that faces the British people.
So today we are publishing our analysis of what will happen to public spending if David Cameron and George Osborne are re-elected.
And challenging them to come clean with the British people about what their plans really involve.
The analysis which we are publishing today reveals the true scale of the spending cuts that George Osborne’s plans will mean for our public services, and for unprotected spending departments if they are actually delivered.
It shows that the discretionary cuts to spending are not the £30 billion which David Cameron and George Osborne have repeatedly claimed they are, but more than double that figure.
There are five hidden factors responsible for this massive scale of spending cuts, and I want to expose them all today. All of them are based on the Treasury’s own published plans and the Tories’ stated commitments.
First, the £30 billion cut the Tories claim they are going to make after the election is not for the whole Parliament, but for the first two full years – 2016/17 and 2017/18 – only.
If we look at their own spending forecasts over the full period – up to 2019-20 – the actual minimum planned reduction in public spending is £37 billion.
But that does not take into account other areas where spending is due to rise over the next Parliament, or where commitments have been made to cut tax.
To achieve those planned spending increases and promised tax cuts, the scale of spending cuts in other areas must increase even beyond £37 billion to meet the Treasury’s targets on the deficit.
So second, we look at planned increase in spending on pensions and social security which is forecast to rise from £218 billion in 2015-16 to £241 billion in 2019-20.
That takes the scale of the cuts required in other areas to £55 billion.
Third, capital spending is also forecast to rise. That will require even bigger cuts to day-to-day spending to meet the Chancellor’s deficit target, taking the total up to £59 billon.
A figure confirmed by the IFS in their 2015 Green Budget.
Fourth, the commitment to maintain spending on Overseas Development Assistance (ODA) at 0.7 per cent of Gross National Income adds a further £1 billion to the cuts required elsewhere, because – to maintain that commitment – ODA spending must rise slightly faster than inflation.
Fifth and finally, the Tories have also committed to make a number of tax cuts at some stage over the next Parliament.
Unlike Labour’s plans, these Tory tax promises are totally unfunded and they have not specified when these will come in.
The only stipulation the Tories have made is that, in order not to disrupt the Treasury’s stated plans on the deficit, they should be paid for from additional cuts in spending.
Our calculations take the cautious assumption that they will be introduced in the final full year of the next Parliament.
That would cost £10 billion a year according to the House of Commons Library.
Putting these five hidden factors together, we can see that – in order to keep all their commitments on spending, tax and the deficit – the Tories would in the next five years need to make spending cuts which add up to a staggering total of £70 billion.
The scale of these £70 billion of cuts is unprecedented.
The OBR has already said they would take us back to public spending as a share of GDP last seen in the 1930s – a time before there was even a National Health Service.
While the IFS have said this would take “total government spending to its lowest level as a proportion of national income since before the last war.”
And the analysis we are publishing today shows Tory plans mean:
Spending cuts larger in the next four years than in the last five years – we are not even half way through the cuts the Tories are planning.
Spending cuts which are larger than any time in post-war history – a bigger fall in spending as a share of GDP than in any four year period since demobilisation at the end of the Second World War.
Spending cuts which are larger than any other advanced economy in the world.
More extreme than in this Parliament, the most extreme in post-war history and the most extreme internationally.
And today we are also publishing an analysis of what these unprecedented spending cuts would mean in departments the Conservatives have not said they are ring-fencing.
The only area in which George Osborne has given any indication of the scale of expected cuts is to the welfare budget.
He says there will be further cuts in benefits and tax credits of £12 billion, even though he has only spelt out where £3 billion of those cuts will come, and has singularly failed to meet his existing targets for the reduction of welfare spending in this Parliament.
Nevertheless, let us take him at his word and assume that £12 billion of the £70 billion cuts come from that area. That leaves £58 billion to be cut from other areas which the Conservatives have left unprotected.
You might think it is a reasonable assumption that these cuts will be applied across departments in roughly the same proportions as they have so far applied in this Parliament.
However, if each department were to get the same share of these £58 billion of cuts as they had done in this Parliament it would mean key government departments would be virtually eradicated – a total of three would cease to exist, insofar as their day-to-day budgets are concerned.
The Foreign and Commonwealth Office, the Department for Work and Pensions and the Department of Transport would actually have no day-to-day budgets left at all while others such as DCLG would almost cease to exist.
For example, the FCO budget is currently £1.2 billion a year. In this parliament it has had three per cent of the cuts to departments. Repeating this again based on £58 billion would mean a cut of £2 billion. The FCO would disappear.
Cuts on this scale would mean closing our embassies around the world, closing down all job centres and back to work programmes and all but ending central government’s funding for local government.
This is clearly impossible to countenance.
So we have instead applied the £58 billion of Conservative spending cuts to non-protected areas equally.
This would mean a cut of 35 per cent to non-protected areas between 2015-16 and 2019-20.
And our analysis shows this would mean:
At a time when the terror threat is increasing and child protection under great pressure, huge cuts in the Home Office Budget, the equivalent of 29,900 police officers and 6,700 PCSOs lost.
Under these deeply risky plans the Tories would have cut police numbers by a third since 2010 and would take the overall numbers of police below 100,000 – well below the smallest force since comparable records began.
At a time when there is such instability on Russia’s borders, the Middle East is in turmoil and the Jihadist threat from Africa is growing, huge cuts in the defence budget – the equivalent of 34,500 fewer soldiers in the Army, and 60,800 fewer personnel in the Armed Forces. This would be our smallest Army since Cromwell and the smallest Armed Forces since 1750.
At a time when huge pressures on social care are already having a knock-on impact on our NHS, these 1930s Tory spending plans would mean further deep cuts in the social care budget too.
Our analysis shows these extreme cuts would be the equivalent to over a third of the older people receiving social care losing their entitlement to it.
This would mean eligibility to care services further restricted, meaning hundreds of thousands of vulnerable older people missing out.
It would mean even more elderly people trapped in expensive hospital beds when they don’t need to be. And it would mean even more elderly people turning to A&E because they are unable to access the care and support they need.
No wonder that the Institute for Fiscal Studies has said these cuts are “colossal” and questioned whether they could be delivered without “a fundamental reimagining of the role of the state”.
So this is the implication of the choice that George Osborne made last December – and which he is now trying to brush under the carpet.
If he is to deliver on his Autumn Statement plans for a £23 billion overall budget surplus, as he says, through a Budget with no fiscal loosening, while promising unfunded tax cuts in the next Parliament, then he is going to have to deliver these colossal cuts, which would lead to:
- the smallest police force since comparable records began;
- the smallest army since Cromwell; and
- over a third of older people receiving social care losing their entitlement to it.
An unprecedented £70 billion of spending cuts which would be deeply destructive and close to impossible, even for this Chancellor.
So George Osborne must surely have an alternative plan in his back pocket.
One possibility is that the Chancellor is planning a further rise in VAT.
After all, before the last election he and David Cameron claimed they had “absolutely no plans to raise VAT”.
And then they raised it in the first Budget to 20 per cent.
So one option is that, in the face of cuts to policing, defence and social care which many will see as totally undeliverable, even by this Chancellor, that David Cameron and George Osborne are planning a further VAT hike.
When we asked the Chancellor this question in January, he replied:
“Our plans do not involve a VAT increase”.
I do not think the British people will be fooled by that one again.
But there is a second alternative available to the Chancellor.
The plans set out in the Autumn Statement represent a reduction of 3.8 per cent of public services spending as a share of GDP. The National Health Service currently accounts for a third of total public services spending.
The analysis we are publishing today shows that across the OECD, there have been only seven countries since 1945 where reductions on this scale have been attempted and for which we have available health spending data.
And across these examples, public spending on health care has been cut – on average by one per cent of GDP.
If the average experience of these past fiscal consolidations were to be replicated in the UK over the coming four years of the next Parliament, then this would imply a real terms cut in NHS spending of over £10 billion by 2019-20.
And as we highlighted last month, the international evidence shows that countries with total government expenditure at 35 per cent or below are far more likely to charge for health services than the UK.
In the UK, out-of-pocket expenditure on public healthcare currently represents 10 per cent of total expenditure on health.
For OECD countries with public spending at 35 per cent of GDP or below, the average level of out-of-pocket expenditure as a proportion of total expenditure on health is 35 per cent – more than three times the UK level.
So the evidence is clear – countries which reduce public spending at the pace George Osborne intends have found they have had no alternative but to cut health spending.
And those who have reduced public spending to the levels that George Osborne is seeking have health systems where charging for services is triple the share here.
This shouldn’t be a surprise. When George Osborne’s plan means such extreme cuts to day to day departmental budgets it’s common sense that the NHS, which makes up a full third of the £317bn spent in those budgets, ends up footing the bill.
Even though our NHS is currently under great financial pressure, the international evidence which we set out in our document today suggests that the NHS will end up paying the price if George Osborne pursues his extreme planned spending cuts.
With the Conservatives planning cuts to day to day spending in the next Parliament more than double the level they claim – an unprecedented £70 billion of spending cuts which would be deeply destructive and close to impossible, even for this Chancellor – there is a real risk that the Chancellor will be forced to bear his promise to ring-fence the NHS.
And after their broken pledge not to have a top-down re-organisation of the NHS in this Parliament, the British people know that the Tories have form when it comes to broken promises on the NHS.
So this is the choice George Osborne must make if he is to stick to his fiscal plans – to raise VAT or to make his deep spending cuts add up by cutting NHS spending.
But it doesn’t have to be this way.
While the Tories have extreme and risky plans – an ideological second-term Conservative project to shrink the state which go far beyond the necessary task of deficit reduction.
And while some other parties say we do not need to get the deficit down
Labour has a better, different, fairer and more balanced plan which means we are the centre-ground party in British politics today.
We will cut the deficit every year and balance the books – with a surplus on the current budget and national debt as a share of GDP falling, as soon as possible in the next Parliament.
How fast we can go will depend on the state of the economy, including what happens to wages, growth, the housing benefit bill and events around the world.
Unlike the Tories we will make no unfunded commitments. And we want the OBR to be allowed to audit manifesto spending and tax commitments.
Our fairer and more balanced approach is very different to the Tories’.
First, there will need to be sensible spending cuts in non-protected areas. For example, we will cut winter fuel payments from the richest five per cent of pensioners and cap child benefit at one per cent for two years.
And our Zero-Based Review of every pound spent by government is identifying savings and cutting out waste and inefficiencies – so we can safeguard vital public services upon which people and businesses depend.
We have already published eight interim reports which identify savings including:
- £250 million in the policing budget, including from scrapping elected Police and Crime Commissioners and reforming police procurement through mandatory joint purchasing of equipment by police forces;
- £500 million a year in the Communities and Local Government budget through shared services, back-office collaboration, and streamlining;
- over £70 million of annual savings in the courts budget including, co-locating county courts and magistrates courts and scrapping the use of the 15 High Court judges’ lodgings;
- £230 million saved by cutting back on the wasteful expenditure related to the Government’s Free Schools and Academies programmes; and
- £60 million of efficiencies in the defence budget by bringing down the numbers of the armed forces top brass to sensible levels, better managing inventory, and improving defence procurement.
Second, we will also make fairer choices: reversing this government’s £3 billion a year tax cut for the top one per cent of earners and introducing a Mansion Tax on properties over £2 million to help save and transform our National Health Service.
And third, our plan will deliver the rising living standards and stronger growth needed to balance the books. So we will:
- Increase the minimum wage to £8 an hour before 2020 and give tax breaks to firms who start paying the living wage;
- Cut business rates for small business properties;
- Establish a British Investment Bank to boost lending for small and medium-sized businesses to grow and create jobs;
- Make work pay by expanding free childcare for working parents and introducing a lower 10p starting rate of income tax to help 24 million working people;
- Get at least 200,000 new homes built a year to relieve Britain’s housing crisis;
- Secure Britain’s place in a reformed European Union and boost exports;
- Set up an independent National Infrastructure Commission in order to stop long-term decisions being kicked into the long grass;
- Devolve £30 billion of economic power and funding to city and county regions;
- Ban exploitative zero-hour contracts to ensure that workers who work regular hours get a regular contract; and
- Introduce a Compulsory Jobs Guarantee, paid for by a bank bonus tax, to provide a paid starter job for everyone young person unemployed for over a year which they will have to take up or lose benefits
A better plan for more good jobs and more balanced growth.
Because OBR figures show that if our economy was not to slow down this year but instead grew by half a per cent a year faster than forecast over the next Parliament, government borrowing would be over £32 billion lower in the next Parliament.
And our calculations show that if wages grew in the next Parliament in line with their historic average, tax receipts would be £12 billion higher.
Decisive action to strengthen growth, increase productivity and get sustained rises in living standards is the only way to balance the books fairly in the next Parliament and safeguard vital public services.
So the choice for the British people is now clear:
A tough, but balanced and fair plan to deliver rising living standards and get the deficit down with Labour
Or an extreme and risky plan under the Tories for bigger spending cuts in the next four years than the last five years which would cause huge damage to our public services and put our NHS at risk.
And the Tories now have a choice too.
They can either say that these unprecedented, extreme and close to impossible cuts to our police, armed forces and social care are the true consequences of their spending plans.
Or they can confess that their plans are in fact impossible to achieve without breaking their promise to protect the NHS.
If David Cameron and George Osborne cannot spell out how their sums add up for non-protected departments in order to achieve their fiscal surplus, the British people can only conclude – and would be right to conclude – that alternative plans do exist: to cut NHS spending and introduce charging.
David Cameron and George Osborne must come clean or the British people will draw their own conclusions.
And then, in May, they will make their choice.