Government must cut public spending by 3% a year to eliminate deficit

11 June 2010 

· The Adam Smith Institute calls on the new government to reduce public spending by at least 3% a year in real terms to balance the budget by 2015

· Nearly £20billion of spending cuts each year for the next five years must be made

· No department should be exempt from cuts

In a new report released today, the Adam Smith Institute (ASI) has called on the government to implement £91billion of cuts by 2015 to eliminate the deficit. This equates to a reduction in public spending across all departments of 3% a year for the next five years.

According to the ASI, the government is right to move early to cut spending and reduce the deficit but Nigel Hawkins’ report The Party Is Over – A Blueprint for Fiscal Stability argues that the government must go further. It claims that no budget should be ring-fenced and says that even the Health budget should be subject to an annual reduction of 2% a year. Further cuts also need to be made in the current financial year if the deficit is to be eliminated within the course of this government.

According to the report, Secretaries of State should expect to lose their jobs if they are unable to deliver the necessary savings – such is the economic importance of bringing spending under control.

The figures within the report are based on the Treasury’s current growth forecast and exclude spending on debt interest payments, which the Institute claims can only be brought down over time by reducing the national debt. However if Monday sees these growth assumptions downgraded, further cuts will be needed to balance the books.

ASI Senior Fellow and City Economist Nigel Hawkins said:

“Some economists say we should delay reducing the deficit until the economy has recovered, but our view is that the financial risks of deferring public expenditure cuts – including a possible run on the pound – far outweigh the risks of depressing the economy. As the plight of Greece demonstrates, there is one compelling priority for the new Coalition Government – deficit reduction.”

Dr Eamonn Butler, the director of the Adam Smith Institute, added:

“Quite plainly some very large reductions in public expenditure are going to be necessary over the next five years – that is the unavoidable consequence of the last government’s fiscal incontinence. But the good news is that countries like Canada and Sweden have shown us how it can be done. We need to look beyond cuts, and actually think about far-reaching reform. The key is to fundamentally rethink the role of the state. What do we really need government to do? And what is the best way to do it? These are the questions the Comprehensive Spending Review must ask if our fiscal problems are to be solved in the long run.”

1. The £91billion of cuts are broken down as follows over the next five years:

2010 – 2011: £19.3 bn
2011 – 2012: £18.7bn
2012 – 2013: £17.9bn
2013 – 2014: £17.8bn
2014 – 2015: £17.1bn

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