How to cut spending by £118bn, overnight

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Politicians find it difficult to cut public spending. Even Margaret Thatcher, who was accused of making savage cuts, didn’t manage it, with spending growing by 1.2 percent a year in real terms from 1980 to 1990. And yet Britain today desperately needs spending cuts. The deficit this year is forecast to be £178bn and – even making some heroic growth assumptions – will not be much below £100bn in 2013. This deficit, which the OECD puts at 14 percent of GDP, is not just the result of the financial crisis and the recession. Indeed, the structural deficit is 10.4 percent of GDP, which is to say we’d still be massively overspending even if the economy were performing well.

The trouble is that ‘efficiency savings’, every chancellor’s favourite ‘get out of jail free card’ just won’t cut it this time. Even if the government could deliver substantial efficiency savings (and history, not to mention public choice theory, suggests that this is unlikely), they still wouldn’t be big enough to do much about the deficit. So instead of looking at the public sector as it is today, and trying to work out how money could be saved, the next government ought to take a different approach. They should start by making a list of the things that government should be doing, and then simply abolish everything else.

Let’s say that they decided to keep pensions and welfare as they are – that would cost £225bn a year. And let’s say they do the same for healthcare, which is set to cost £120bn. They could provide a £4700 school voucher for every child in primary and secondary education for £60bn a year. Maintaining spending on transport and key infrastructure at current levels would cost £30bn a year, while government’s core functions (foreign policy, defence, law and order) would cost £80bn. That comes to a total of £515bn. Throw in £43bn in debt interest payments, and it comes to £558bn – £118bn less than the projected 2009/10 total. Do we really need government to do anything else? After all, it’s not as though I’m outlining a minimal state here.

Of course, that £558bn would still leave a deficit, with 2010/11 tax receipts only forecast to be £528bn. But there are plenty of other things you could do. The regulated legalization of drugs would save a further £10bn a year, while cancelling foreign aid would save another £10bn. And that’s just for starters – reforming pensions and benefits could save many billions more.