UK budget plan could change state beyond recognition: think tank

[LONDON] Britain's public sector could"change beyond all recognition" by the end of the decade as a result of deep spending cuts planned by finance minister George Osborne for after May's election, a leading economic think tank said on Thursday.

Analysing the scale of a spending squeeze outlined by Osborne on Wednesday, the Institute for Fiscal Studies said cuts to public services could be deeper than the spending reductions carried out so far in his austerity push.

Spending adjusted for inflation in areas such as defence, policing and transport could be as much as 41 per cent lower by 2020 than it was in 2010 when Prime Minister David Cameron took power, it said.

That estimated cut could be less severe, depending on the size of welfare savings which Osborne says he would introduce if Cameron's Conservative Party is re-elected next year.

Cameron and Osborne decided to protect health, schools and overseas aid from cuts when they launched their push to fix Britain's public finances four years ago, concentrating the reductions in other areas of government spending and on welfare.

Despite a strong economic recovery since mid-2013, Britain is not yet half way through the austerity plan.

So far, the unprotected departmental spending areas have suffered cuts of nearly 20 per cent, the IFS said in a briefing.

IFS director Paul Johnson said Osborne could answer those who questioned the feasibility of his planned future spending squeeze by pointing to the big spending reductions so far. "But it is surely incumbent upon anyone set on taking the size of the state to its smallest in many generations to tell us what that means," he said. "One thing is for sure," he said. "If we move in the anything like this direction, whilst continuing to protect health and pensions, the role and shape of the state will have changed beyond recognition," he said, an unusually stark tone for the IFS which is renowned for its academic focus.

Mr Cameron will seek a mandate for further spending cuts in May's election. The opposition Labour Party has called for a slower pace of deficit reduction and more investment to help tackle falling living standards.

Mr Osborne's plans would lower public spending to its smallest share of Britain's economy in 80 years, the country's independent budget forecasters said on Wednesday.

To illustrate the size of the challenge, Johnson said annual welfare payments would have to be cut by 21 billion pounds (US$33 billion) - almost double Osborne's proposals - by 2020 if the government wanted to avoid cutting spending on public services at a faster rate than it has already done over the past four years and stuck to its plans not to raise taxes.

Adding to Britain's fiscal headache, Prime Minister David Cameron has said he wants to eventually introduce income tax cuts worth 7 billion pounds a year if he is re-elected in May, potentially putting further strain on the public finances.

Some investors are sceptical that the Conservatives can win a majority in May, raising questions about their ability to push ahead with the kind of spending cuts that Mr Osborne has proposed. "At this stage, we have a remarkably unclear picture about who will be calling the shots once the May election is over," Liz Martins, an economist at HSBC, said. "If the new government relies on the support of smaller parties, it could struggle to gain support for fiscal tightening measures."

REUTERS