George Osborne has told Whitehall departments that the fresh squeeze on government spending has begun, ordering them to make an immediate start on finding the £13bn of cuts needed for the next phase of his deficit reduction plan.
The chancellor told the CBI he wanted to be able to announce savings from all spending apart from the ringfenced areas of health, schools and overseas aid in his summer budget on 8 July.
With Osborne eager to enact tough measures as early as possible, the new chief secretary to the Treasury, Greg Hands, has started to ask departments whether they can find ways of trimming their 2015-16 plans to fast-track the three-year squeeze.
Osborne told the annual dinner of the employers’ organisation in London: “When it comes to saving money, we all know that the more you can do early, the smoother the ride.
“And without fixing the public finances so our country lives within its means, there can be no economic security for businesses or working people.”
The Conservative party said in its election manifesto that it would adopt a three-pronged approach to deficit reduction in the current parliament: £13bn of departmental spending cuts, £12bn of welfare cuts and £5bn of extra revenue from a crackdown on tax avoidance.
Osborne said Whitehall departments underspent their budgets in previous years and Hands was asking them to find ways of doing so again in the current financial year.
Treasury sources said the expectation was that the savings would be found from day-to-day running costs rather than capital projects but it would be up to departments to come up with suggestions.
Before the election, Osborne served notice on Whitehall that he would be expecting fresh cuts in the event of a Conservative victory. These savings have to be made by 2017-18, but if departments have already identified savings they will come under pressure to bring them forward. No fixed target or timetable has been set at this stage.
By the time the spending squeeze is over in 2017-18, the independent Institute for Fiscal Studies (IFS) estimates that the budgets of unprotected Whitehall departments such as justice, transport and the Home Office, will have been cut by a third once inflation has been taken into account.
Opposition to Osborne’s plans will centre on what the cuts mean for sensitive areas of public spending, including policing, prisons, the armed forces and the courts. Job cuts and pay restraint are likely to feature as important parts of the money-saving programme designed to turn the UK’s budget deficit – forecast to be £75bn in 2015-16 – into a surplus by 2018-19.
Traditionally, governments of both left and right have tried to impose spending cuts and tax increases in the first budget of a parliament in the expectation that the pain will have been forgotten by the next election.
Osborne will also use his second budget of 2015 to outline how he intends to shave about 10% off the £120bn slice of the welfare budget that is not spent on pensioners. The Conservatives refused to detail where the cuts would be made during the election campaign, but the IFS said child benefit and disability allowances would inevitably have to be looked at.
The chancellor announced that he would seek to tackle Britain’s poor productivity record, starting with the publication of a new “Plan to make Britain Work Better” before the budget.
The Treasury said this would identify what needed to be done to alleviate long-running weaknesses in areas such as transport, broadband, planning, skills, ownership, childcare, red-tape, science and innovation.
“Let me be clear: improving the productivity of our country is the route to raising standards of living for everyone in this country”, Osborne said.
“So by the budget, I will publish our productivity plan, our plan to make Britain work better. Our future prosperity depends on it.”
Britain’s productivity has stagnated since the country went into its deepest postwar recession in 2008, with output per head 15% below where it would have been had the pre-crisis trend continued and about 30% lower than in rival countries such as the US, Germany and France.
Osborne said nobody knew why Britain’s record had been so poor but said he would rather “have the productivity challenge than the challenge of mass unemployment”.
Hinting that the government would soon announce plans for the siting of a new runway in the south-east of England and pledging extra investment in roads, railways, broadband, housing and skills, the chancellor said: “It is now within our grasp to make Britain the most prosperous country in the world and the best place to do business.
“It would be very easy at the beginning of a second term to take our foot off the pedal. That’s not what we’re going to do. I want Britain to find that extra gear.”
The chancellor announced the creation of a new government-owned company, UK Government Investments (UKGI), as part of the government’s plan to reduce the national debt by selling of more than £23bn of publicly-owned corporate and financial assets in 2015-16. UKGI will bring together the two bodies that manage the taxpayer stake in businesses – the Shareholder Executive and UK Financial Instruments – into one holding company.
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