Andrew Grice: Doing the unthinkable - how to slash spending

Gordon Brown's troubles have eclipsed the biggest issue in politics – but hard choices await in the battle to balance Britain's books

(PA)

"The trouble with Gordon is that he wants to go off at a gallop before he makes sure he's properly saddled up." That is how one aide described the Prime Minister's hard ride over MPs' expenses.

Mr Brown was doing the right thing – he got most of his reforms through – but it looked to the public like he had taken a fall because he hadn't lined up enough support for his now-abandoned plan to change the "second homes" allowance paid to MPs. What should have won him credit turned into another fine mess, eroding confidence in him among despairing Labour backbenchers.

Mr Brown's travails have eclipsed, temporarily, the biggest issue in politics – how to restrict public spending to balance the nation's books. The headlines after last month's Budget were dominated by the 50p top tax rate but two-thirds of the black hole in the public finances is to be filled by spending cuts and only a third by tax rises. There was the usual blather about more "efficiency savings" – £9bn compared to a borrowing figure of £175bn in the current year – but little sign of where the spending squeeze would bite.

Every politician knows that spending has to be contained yet few are prepared to engage in a proper debate about how. The trouble is that there is a general election coming – my hunch is in April next year – and so the parties' actions are moulded by their election strategy rather than the country's long-term interests.

Of the three main parties, only the Liberal Democrats have spelled out big ticket savings that measure up to the scale of the problem. This is much to their credit. But they can afford it politically, since they are not going to form the next government.

There is an intense post-Budget debate at the highest levels of Labour and the Tories about how much to say about public spending. For now, that debate is being conducted behind hermetically-sealed doors. There are those within both the big parties who want a more open debate. Yet there are also those counselling caution and warning against giving hostages to electoral fortune.

Alistair Darling is keen for a wider public debate. The Chancellor told the Institute of Directors on Wednesday that "difficult decisions" were needed on both spending and tax and even tiptoed into the minefield of public sector pensions.

There are other clues to the Government's thinking but you have to look hard. Buried in the industrial strategy unveiled by Lord Mandelson last month was this: "Britain's economy will look different in coming years. Both consumer and government spending will be more constrained than over the past decade. There will be an even greater concentration on value for money through reform and efficiency savings in the public sector, which is likely to involve the private sector more, rather than less, in service delivery."

If David Cameron put that in a policy document, Labour would scream "Tory cuts" and warn that all public services would be privatised by an incoming Tory Government. Herein lies the problem. The Cabinet will debate how to tackle the public spending issue. But if, as some of its members suspect, it comes down to a choice between economics and politics, the latter will win out.

Mr Brown's favourite dividing line is "Labour investment versus Tory cuts". As the shadow Chancellor, George Osborne, points out, it is harder to make that stick when "Labour cuts" are in the pipeline.

Brown allies insisted his theme can be applied to the new times. Some "investment" – in the industries of the future, for example – will be needed to maximise growth, which is the best way to fill the black hole because it will get people back to work, boost tax revenues and cut benefit bills.

While voters have had their fill of higher taxes and want the Government to cut its cloth, they don't want a "slash and burn" approach to public services, ministers believe. They suspect the Tories will lose votes among the five million public sector workers and their families. "'Vote for me and lose your job' is not a very good slogan," one cabinet minister said.

The Tories are preparing for government, and also unpopularity. Labour strategists suspect that Mr Cameron's talk of an "age of austerity" will be too gloomy for many voters, especially if some green shoots of recovery are sprouting by the election – perhaps Mr Brown's last hope.

The Tories insist that Mr Cameron is being realistic, not pessimistic. He said this week that the crisis in the public finances meant that "you have to review all spending" but insisted he would "not balance the budget on the backs of the neediest". He promised to say more about how spending would be constrained – but not yet.

After Mr Brown's terrible week, I can see the attraction of riding to victory on an anti-Labour protest wave. But there will come a time when the Tories need to win positive support too. "Vote for austerity" is not a very good slogan either. Perhaps there are more votes in being honest than the two main parties think.

What I'd cut: Experts have their say

Restructure the pensions system

Frank Field

Ex-Labour welfare reform minister

We need to replace Pensions Credit [which tops up the Basic State Pension] with a funded scheme run at arms-length from the Government by the private sector, with the Bank of England as its trustees. If people realised it made sense to save, the cost of means-testing would go down rather than up. The Basic State Pension would remain, with the risks spread for all. People would decide what to pay into the top-up scheme. We could phase out a £15bn subsidy for pensions over 15 years – not with a mad axe. We could end pensioner poverty. Public sector workers should have to pay in more of their own money. Means-testing could be ended throughout the system, on housing benefit and tax credits too. Over time, we could save £45bn by moving from the current scattergun approach. I fear cuts will be made in a panic.

Switch off the surveillance state

David Davis

Conservative MP for Haltemprice and Howden

We cannot achieve the cuts in public spending we need by the Chancellor's "efficiency savings". Some savings are easy to find. My party would cancel the identity card scheme, cutting about £5bn of spending at once. Databases are another obvious area: government IT projects have a predictable tendency to overrun on cost, particularly when the purpose of the project is ill-defined; and they are prone to mission creep. We have seen it with all counter-terror and pre-emptive legislation. There is a tendency to use it for purposes for which it was not originally intended. In particular, the internet scrutiny scheme, costing around £2bn, should be scrapped. The Contact Point children's database, with running costs of £44m a year, should also be stopped.

Rethink the NHS

Niall Dickson

Chief executive of the King's Fund health think tank

The NHS cannot be immune. There is an opportunity now to redesign it. Length of stay in hospital will have to be reduced to push down the cost per patient; day surgery can be increased. We need to do a lot more to stop people being admitted to hospital unnecessarily. They could be better treated in their communities, allowing a reduction in the number of beds. We have too many centres in London for stroke care. Politicians are nervous about anything that looks like closure of a hospital. But if it creates a more efficient service, we ought to get on and do it.

Scrap Trident

Jon Cruddas

Labour MP for Dagenham

Dealing with the current climate means reordering the priorities of public policy. Some of us have been arguing for years that the Trident project could cost as much as £80bn over the next 20 years, which is a massive slice of public expenditure. A lot of the cost is front-loaded as well, and will come just as public spending cuts arrive.

Since we had the vote in the House of Commons in 2007, in which almost 100 Labour MPs voted against the renewal of the Trident system, the strength of the argument to back Trident has weakened further.

This hangover from the Cold War no longer addresses the threats to this country, which do not come from rival states but from small groups determined to carry out terrorism. President Obama has come in on an agenda of cutting.

Abandoning the renewal of Trident would really go with the grain, and could prove very popular if it was presented in the right way.

I know elements within both the Conservative Party and the Labour Party, even within the Cabinet, are sympathetic to the idea. But it will take political will. The question is, have we got that political will?

Cut cost of public sector pensions

Vince Cable

Liberal Democrat Treasury spokesman

Public sector pensions have to be confronted across the board. With all the other commitments on the public purse, I don't think they are affordable. We have to bite the bullet. You would get a long-term payback.

You can't tear up existing commitments to people already receiving them. You can change arrangements for new entrants, but that takes 30 years to work through. You also need to look again at employee contributions, to see if they could be increased. I wouldn't rush into it in a panic. But we need to have a quick review and then do something radical. We should also look at ID cards, information technology in the NHS, tax credits, defence spending and if a target of seeing 50 per cent of young people in higher education is sustainable in the current climate. We need a grown-up debate about spending. We spent a vast amount of time in Parliament on the minutiae of tax reform, but play no role in determining public spending priorities. It is ludicrous."

Provide state services mostly online

Matthew Taylor

Tony Blair's Downing St Head of Policy, now chief executive of RSA think tank

I don't want to see cuts to services. There is a way to avoid that. At present, the Government uses the internet in addition to conventional service provision. It should make online services the norm where possible, saving huge sums of money. So far, technology has not reduced costs in the public sector. But we have not yet bitten the bullet and aimed for universal online provision. It would ensure we improve access to the internet; it would make people more employable; it would help in areas such as teaching, Jobcentre Plus and benefit claimants.

We need to explore the scope to re-engineer services to substantially cut costs, not just slash back-office staff. Schools could move to a four-day taught week for key stage four pupils, with the fifth day used for self-guided study. With the right use of space, online tuition and teaching support, this could save a great deal of teaching time and be good for pupils.

Freeze public sector pay and recruitment

John Redwood

Conservative MP for Wokingham

We do not need to cut doctors, teachers or hospitals because we have not acted yet on the most obvious things. For example, the Government's chief scientific adviser is currently appointing an expensive chief scientific adviser to every Whitehall department. We cannot afford such luxury. The level of waste is embarrassing. To control this monstrous machine, I would impose a staff freeze on all non-frontline workers. There are already plenty of talented people within the public sector. We also need a period of no or low growth on public pay. Billions are spent on consultants. They must only be used where skills cannot be found in-house.

Stop pointless aid

William Easterley

Professor of Economics, New York University

It is counterproductive to obsess about the total amount of aid, because it substitutes for a serious discussion of whether the aid dollars are reaching the poor and helping them. Aid agencies have succeeded in making the discussion focus on the amount, like this nonsense about a target of 0.7 per cent of GDP, or the ritual call for a "doubling" of aid for a region or purpose.

There are bad kinds of aid which could be questioned, such as budget support for corrupt and autocratic governments. It seems perverse to support them in their oppression of and theft from their population. For example, the UK gives budget support to Ethiopia, which has a corrupt and autocratic government. In 2007, the UK gave more than £460m in budget support to 13 countries – only Ghana and India were classified as "free" by the annual Freedom House ratings on democracy.

Aid to stop farmers growing drug crops has no benefit. Drug production will shift elsewhere if the aid is successful and the farmers will probably be hurt.