I’m going to be producing reams of words here, there and everywhere about the Chancellor’s debate, so I ought to get on top of the big issues.  Help me out on this one. (PS: This post is being updated as my feeble understanding rises)

The Conservatives put cutting the deficit top of their list of priorities, and do not believe in Keynesianism as much as Labour: if they take steps to increase the deficit, they think the financial markets will somehow compensate for lost demand.  Now they have identified £12bn of savings that can take place immediately.  But rather than give all £12bn to a ravening Bond Market, they want to use half raise the NI threshold. Here is Chris Giles explaining in more detail.

As Policy Exchange showed last week, an NI cut may have a good effect on unemployment.  NI is a damaging tax. First to go if you have a choice.  But as Stephanie Flanders observes, ‘wasteful’ backoffice staff and managers spend money too*.   A Keynesian might worry that government spending cuts demand more than the NI cut raises it, depending on the propensities to hire labour and spend income and all that.

Now my confusion. Are these Conservative efficiency savings on top of the £11 billion (see Times story) savings that Darling promised – and which the Conservatives widely mocked as difficult to achieve (even by 2012/13)?   It seems a bit bizarre that an Opposition party can find greater and quicker efficiency savings from outside government, than the government can find itself.

Labour plan to ‘reinvest’ the savings they find in ‘saving front line services’.    Do the Tories now think that Labour savings are doable and would they also ‘reinvest them’ to maintain frontline services?  If they do not find them realistic then they will either have to increase taxes to maintain frontline services, or cut those services.  But this is not the question being asked.  Perhaps (as Neil points out, comment below), the Tories have worked out from opposition that Labour’s efficiency savings are not realistic, but that their own harder ones are quite easy to do – so easy that they can bank on them for a tax cut.   My own instincts about how easy it is to get cost out suggest this is a big ask.   My instinct is that if Conservative savings are realistic, then so must be Labour ones, but I must concede that there is a possibility that Neil is right.

If the Conservatives do NOT think that Labour’s plans are realistic, then all that has happened is they have announced “We are replacing Labour’s impossible efficiency savings with Tory realistic efficiency savings.  And instead of using them all to maintain services, we are funding an NI cut.” So my confusion is as much about the Labour baseline as the Tory plan.  I can understand “Cut waste, cut taxes”.  It is a timeless message.  What I can’t get is which waste – already identified waste or new waste that Labour have stubbornly refused to touch.

The other thing that confuses me is a sort of volte face on the deficit.  David Smith agrees, writing “Tories surrender the Fiscal HighGround“.  Chris Giles too, saying that “the deficit is playing second fiddle”.  If all their screaming about debt was meant to mean anything it was that we need to put this agenda above everything.   Using such ‘easy to find’ efficiency savings for a tax cut – on top of commitments to provide marriage tax breaks and higher IHT thresholds – does not scream “deficit hawk”.   Plus, as Chris Giles again observes, the first waste reduction is the “easy” stuff: if this gets blown on tax cuts, then deficit reduction needs the harder stuff.

David Smith is scathing, claiming that Labour’s deficit-cutting plans are now more credible and better timed for the weakness of the economy.  Quoting the IFS, he writes:

By cutting spending next year and delivering the tax cut a year later the Conservative proposal would take additional spending power out of the economy for a year at a time at which the recovery is likely to be at its most fragile. Combined with Labour’s existing plans, it would increase the discretionary fiscal tightening between this year and next to £29 billion or more than 2% of national income – significantly larger than that planned for subsequent years, even though the recovery should by then be stronger.

I share this concern: the next year is more fragile, so I would rather the fiscal hits were being taken further out.  But can those attacking Conservatives have it both ways? How can they have plans that are less credible for cutting the deficit, as well as being fiscally contractionary?  Jeremy Warner helps me find the answer:

the Tory review has identified £12bn of savings which could immediately be implemented, but half of this sum would be in protected front line services and would therefore be reinvested

So the bond market gets none of the 12bn efficiency savings.   Warner worries that the £12bn may also include a lot of what Labour are pushing through, and may not be achievable.

At the end of this all I can’t work out the fiscal effect – how much demand is being taken from the economy and given to debt reduction – or the realism – how much of these cuts are pre-identified by Labour, new and realistic. I suspect that the IFS are closest to getting it right.    There is something to admire in the Tory plans: unlike their IHT cut, or marriage tax allowance, this helps poorer workers and has a stimulative effect.  If one were to find money anywhere, this is a good place to spend it.

UPDATE: James Kirkup has some answers.  The ones about “how confident are you on the £12bn” seem rather weak:

there’s no secret blueprint. What there is, Mr Osborne’s people say, is the “wealth of experience and expertise” held by Sir Peter and Dr Read. That’s not something to be sniffed at, they say. So if they say it’s £12 billion, we should accept that.

And the Conservatives ARE accepting Labour’s savings as well:

Mr Osborne said that his savings will come “on top of” the Labour savings. His team said the Tories have “banked” the Labour savings in their plans … Conservatives insist that, having inspected those vague press releases, Labour has no plans relating to contract renegotiation, staff vacancies etc. So no, no duplication.

After agonising too long about how this works economically, I have to accept that the politics of this is an entirely different matter.  How does this play out with the electorate?  Yes, the Tory Right in the shape of F Nelson is delighted, and even endorses Lib Dem tax plans in a fit of generosity.  But how does Osborne stand up to the charge of being inconsistent on his deficit-cutting-determination?  Not with Laffer curves, I hope.  The Tories had been putting all the chips on “the bond market trusts us best”.  Ed Conway seems to think this a cert.  Even after today?

UPDATE: James McIntosh also thinks this is a “Tories abandon fiscal responsibility” story.  He quotes Dan Roberts who is worth reading on this.

My conclusion: The Tory plans are probably no more realistic that the Labour ones, come sooner and fund an NI cut that is a good idea in itself (though possibly badly timed).  Both are being hopeful.  This is not a game changer

*even such ‘bad’ demand, like that  “which includes the closure of 20 magistrates’ courts, the end of start-up funds for breakfast and after-school clubs, reducing highway maintenance and ending teacher training bursaries. (the Times)”

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7 thoughts on “Efficiency savings: I’ll admit it, I’m confused.

  1. “But if the Conservatives savings are on top of Labour’s then (a) they must admit that Labour’s savings are realistic”

    That doesn’t folow at all. Whether labour’s promise to stop absenteeism is honest or fraudulent doesn’t in any way affect the Tory cuts. If Tory cuts are worthwhile they are worthwhile. One could make an argument that if Labour cuts are kosher Tory cuts are unnecessary but only if you think we can live with a permanent deficit of about £100 bn but the reverse – that Tory cuts prove they think Labour ones are genuine has no logic.

    1. Hi Neil

      I have amended the post slightly. Logically, you may be right. But given the “front line services” constraint, and both parties’ need to maintain them, I think they both need to bank every efficiency saving out there. See James Kirkup for confirmation that my hunch was right.

      g

  2. Unfortunately away from a TV tonight, so no idea wha happened on the debate, and have very little to add to these Gordian knots all the politicians are twisting themselves into.
    However, I can’t help but notice that the automatically generated potentially similar posts has thrown up “Big Teen Butts (2009)”.
    Would anyone like to make the first joke?

  3. “As Policy Exchange showed last week, an NI cut may have a good effect on unemployment. ”

    The report you reference seems to hedge its bets an awful lot about this, though I’ve not followed all the reference through.

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