Why £73bn is the new £90bn
As usual, the Institute for Fiscal Studies (IFS) has pulled an all-nighter and extracted some gems from the reams of documents put out by the Treasury yesterday. Here are the key headlines.
First, the independent think-tank estimates that the chancellor's new forecasts for public spending from 2011/12 to 2013/4 would represent a real cut in departmental spending of 3.2% a year, slightly more than the previous estimate of 2.9% after the budget.
That amounts to a cumulative cut of £36bn over the period.
The protections to frontline schools and other key services for 2011 and 2012 suggest that all non-protected areas would face cuts of 6.4% a year in those two years - or a cumulative £25.5bn.
On National Insurance, they say experience suggests employers will pass on the rise in employers NI. If so, that would mean that only workers earning less than £14,000 a year would be protected from the rises in NI announced yesterday, not £20,000 as the chancellor said.
However, the IFS confirmed that the top 10% of earners would bear most of the brunt of the tax rises planned for 2010-11 - eventually facing a hit to net household income of 5% - if they don't take steps to avoid paying it, a big if in the case of the very highest earners, who face the biggest hit.
Other groups will face hits of 1% or often much less. That would seem to confirm the figures from Labour yesterday (see my other blog today), that the top 2% of taxpayers would pay half of the new taxes.
Carl Emmerson, the IFS's senior fiscal guru, was asked about Conservatives' claims that the NHS would lose out from the pre-Budget report (PBR).
He said he thought that was doubtful, given that the cost of the rise in employers' NI (which, as we have already established, would probably be paid by employees, anyway, not the NHS) - would need to be weighed against the savings to the NHS of having a lower wage bill from 2011 onwards.
Not to mention that 95% of the NHS budget is being protected from real cuts in 2011 and 2012, at considerable cost to other departments.
And finally, I can confirm that £73bn is the new £90bn. Two days ago there was a £90bn a year hole in the budget that the government - any government - needed to fill, either through tax rises or spending cuts. Now it's £73bn.
We'll never know exactly how much the budget needs to be squeezed. But £73bn is a good enough guess to be getting along with.
Before the PBR, Alistair Darling was planning to rely mainly on tighter spending to fill that hole, at least in the first few years of the plan. That's still true, but the balance has shifted sharply in the direction of higher taxes.
Instead of £1 pound in new taxes for £4 of cuts in 2013-14, the ratio in that year will be one to three.
Of course, that's assuming that all those top earners don't manage to suffer a large and inexplicable fall in their taxable income and pension contributions in the meantime.
Or flee the country - as they always threaten to do. Or persuade a Conservative government to let them off the hook.
The IFS also confirmed that the chancellor has not revealed where much of that cumulative £36bn cut in departmental spending will be found.
Towards that number, the government has sad it will find efficiency savings worth £12bn; it will also get £3.4bn from the 1% cap on the public sector pay, £1bn from reforming public sector pensions, and £5bn from eliminating "lower priority" projects, some of which are listed in the report.
That leaves about £15bn unaccounted for, but it's important to remember that any savings on low priority projects, or from added efficiency, which are found in the protected areas - which represent a significant chunk of public spending - will not count toward the £36bn because they will be ploughed back into those protected budgets.
In reality, the government will need to find much more than £15bn in additional savings to meet the £36bn cut imbedded in its forecasts, assuming the IFS's calculations are right.
I spoke about the difficulties of measuring efficiency savings on Monday - even where the government has claimed to have achieved savings in the past, they have not all added up.
If further reason were scepticism were needed, the IFS points out that the government has already promised to achieve some £35bn in efficiency savings in the current spending round, which ends in spring 2011. So far they are only £8.5bn of the way to the £35bn target, leaving a big mountain to climb in the final year.
Update 1817: There's been a bit of confusion about this, but the total cost of fixing the hole in the budget over the next 8 years is going to be the equivalent of £2,400 per family, per year, in the form of higher taxes or lower spending and investment. Unfortunately, that's not cumulative, it's annual.
And what about the Conservatives? Well, it's tricky to compare the Chancellor's plans with George Osborne's, because he has committed to protect the NHS for the full three years from 2011-14, whereas Labour has only mentioned the first two years.
The Tories haven't committed to protect schools (yet), but they have followed the government's commitment to increasing ODA.
On this basis, the IFS reckons that they would need to find cuts of £38.9bn on non-protected departments - which, on the face of it, sounds worse than Labour. That is certainly what Treasury officials have been keen to impress on the British press corps this afternoon.
But - and believe me when I say that this pains me more than it pains you - it turns out that it's more complicated than that. That £38.9bn isn't really comparable to the £36bn figure (sigh), because the £36bn is the cut facing all departmental spending, if you weren't protecting anything, or increasing ODA.
If you take those pledges into account, the cut for other departments under Labour looks very similar to the Conservatives'. And it would be larger, if Labour decided to protect the "frontline" for three years rather than two.
If the Tories would rather not get into all this detail, they have another way to respond to Labour's claims that Conservative cuts on other departments would be worse than the government's. It goes likes this: "we're having to cut other things more because we're protecting the NHS for the full three years. Are you saying you won't?"