Cuts Warning

April 29, 2010

Business

Cuts warning

8:50am Thursday 29th April 2010

By Chris Koenig »

Enter the pothole debate and you will find a parallel for the dilemmas looming for public authorities in Oxfordshire after next week’s election. Some say public money should be spent on filling in potholes, otherwise private cars might be slowed down or, worse, damaged by the jolts. Others say slowing traffic would be no bad thing, and in any case why should the public pay for the preservation of other people’s private property, namely their cars?

On the one hand, regardless of who wins on May 6, public spending will be cut. On the other, private spending must grow to pick up the slack left behind by reduced public spending.

Nationally, the UK faces a fiscal deficit (the difference between income and expenditure) of 11.1 per cent, and has debts totalling 60 per cent of Gross Domestic Product (GDP) — a figure expected to rise to 90 per cent in 2014.

Locally, Oxfordshire’s £15bn economy is particularly exposed to cuts in public spending since it is more reliant on the public sector — for example in health and education — than many other places.

In the county as a whole, 30 per cent of us depend on state money for our daily bread. In Oxford the figure is 40 per cent.

All three main parties now contending the election have pledged to at least halve the deficit by 2014, though none has so far explained exactly how.

In other words whoever wins the election will need to either cut £37bn or raise that figure through increasing taxes, or a bit of both.

What is clear is that austerity in public spending will be unbearable, and impossible to impose, without economic growth in the private sector. But of course raising revenue from increased income tax, National Insurance, and Value Added Tax will tend to put a brake on exactly that: growth in the private sector.

It also works the other way round. In Oxfordshire, for example, public spending cuts will have an immediate knock-on effect on the private sector, particularly since the county council has a policy of buying 67 per cent of its supplies locally. It is committed to cutting its purchases by 15 per cent.

As an example of the austerity heading our way an online simulator developed by the Financial Times newspaper, using Government figures, suggests measures needed to make the required savings include: a block on public-sector pay increases, freezing benefits for a year, withdrawing free bus passes for pensioners and — back to potholes here — halving road maintenance.

We asked the chief executive of Oxford Economic Partnership, David Doughty, what would be the best — or the least bad — scenario for Oxfordshire. Cuts or tax increases; or a mixture of the two?

He said: “The analogy of the potholes works well. A pay freeze in the public sector, despite the relatively high proportion of Oxfordshire people dependent on the state, would be manageable in the short term.

“It wouldn’t really have any effect at all and would be preferable to tax rises — which would slow the car down, so to speak, and risk putting us back into a recession from which we are just emerging.”

Oxfordshire County Council has already announced £106m cuts from its £899m revenue — about two-thirds of which comes from central Government — and 500 job losses from its 22,000 strong workforce between now and 2015.

Mr Doughty said: “Of course, that doesn’t take into account any new cuts an incoming Government may impose on us.”

But to what extent may the appearance of stability in Oxfordshire during this pre-election period be compared to a household that finds itself in difficulty and sails along on borrowed money — until payback time?

Mr Doughty added: “There may be an element of that, but in Oxfordshire we have a high proportion of small businesses which are highly flexible, adaptable, and able to react to changing situations quickly.”

Many of the statistics on which the county council is basing its calculations come from Seeda (South East Economic Development Agency) which the Conservatives, for one, have vowed to scrap.

Seeda (2007) figures show that, in Oxfordshire, education accounts for 41,200 jobs, health 34,000, military 15,000, and local government some 25,000.

Employment in education in the county between 1998 and 2007 grew 52 per cent and now accounts for 13 per cent of the workforce.

Existing Seeda figures predict that between 2006 and 2016 expenditure on public administration, education and health combined will grow by another 21 per cent.

Oxfordshire Economic Partnership is mainly funded by the county council, but Mr Doughty’s salary, ironically, is paid by Seeda. He said: “Much of the public spending in Oxfordshire, apart from education and health, is on the military, for example at Brize Norton, and such things as Harwell and the European Space Agency — which we hope are comparatively safe.”

Witney parliamentary candidate and Conservative party leader David Cameron has said that he favours public-spending cuts over tax rises. Speaking on the BBC’s Panorama programme on Friday, he singled out Northern Ireland and the North East in particular as areas that were over-dependent on the state, but to date he has said nothing about what the effects of cuts might be in his own home ground of Oxfordshire.

The Institute of Fiscal Studies this week accused all three main parties of keeping the electorate in the dark about the extent of the austerity measures on the road ahead. It warned tax rises were likely.

Andrew Goodwin of Oxford’s own think-tank of soothsayers, Oxford Economics, told The Oxford Times: “All parties have spoken of a desire to protect front-line services, particularly in health and education.

“In our view it is important the Government continues to invest in excellence in education in order to maintain UK competitiveness and the Government should take this into account in looking at university funding cuts.”

He added: “To an extent public sector workers have been shielded from the worst effects of the recession so far, with employment continuing to increase and average earnings growing much faster than in the private sector, but the period after 2011 is likely to be very challenging for them.

“However, as the private sector recovers, employment opportunities will appear in private services which are likely to match the skills of a good proportion of public-sector workers and could help mitigate the impact of public-sector cuts.”

He added: “Some of the deficit will disappear as the economy recovers, which will cause tax revenues to pick up and some parts of spending, such as unemployment benefits, to fall. But there remains a sizeable rump which can only be reduced through spending cuts and tax rises.”

However, he warned: “The Treasury themselves admit that more than half the deficit is structural — it will not disappear as the economy recovers.

“This is a direct result of the Government running sizeable budget deficits in the years of strong economic growth when Gordon Brown was chancellor.”


%d bloggers like this: