SPENDING CUTS

So we now know where the pain is going to fall. Wednesday's statement by the U.K.'s Chancellor of the Exchequer (Finance Minister) held almost exactly to the total spending cuts of £83 billion by 2014-15 that he had already announced in his June Budget. With international aid rising sharply in order to meet the U.N. commitment of 0.7% of GDP, the national health service ringfenced in order to meet an election pledge, and debt interest largely out of his control, that meant an average cut in the Government's departmental budgets of 19%. Since education and defence will not be hit as hard as that, other departments will be hit even harder. Grants to local authorities will fall by 27%, and the Department for Communities and Local Government will lose a whopping two thirds of its budget. About half a million public sector jobs will disappear.

In essence, the Government is betting on two things happening. First, that those public sector jobs will be more than offset by new private sector ones, as confidence in the economy recovers, now that there is a credible plan to reduce the public sector deficit. That may or may not happen. Secondly, that by starving programmes, particularly at the local level, of cash, it will produce some radical re-thinking of the way in which public services are provided. Given the U.K.'s highly centralised public sector, more innovation at the local level is sorely needed. However, without the ability to manage the revenue side of the account, local authorities may not be able to implement change, even if they want to; as most organisations know, it often requires an investment in order to be able to make long-term savings. Furthermore, by giving health a free ride, there is very little incentive to manage better a public service that will inevitably grow in the future.

The third issue is that the announcement is just that, namely a plan; those cuts now have to be implemented. Reactions, particularly from affected or likely-to-be-affected public sector employees, have been swift. The U.K. has not yet seen the same sorts of protests that have been occurring in France. But it is very early days; 2014-15 is still a long way into the future.

Walter Blotscher