Move to delay UK spending cuts

At the Tory conference on Wednesday David Cameron said there was no change in the strategy of ending the deficit within a parliament

The Treasury is working on plans to “reprofile” spending cuts next April, spreading the pain of deficit reduction more evenly over the next few years, senior Whitehall officials have told the Financial Times.

Confronted with the difficulties of quickly cutting spending – including financial penalties for breaking contracts and redundancy costs – ministers have been forced to consider delaying some of the big savings until later in this parliament.

Whitehall officials understand the presentational difficulties of delaying spending cuts given the coalition government’s tough rhetoric on reducing the deficit and maintaining the confidence of financial markets.

Labour politicians would surely accuse the government of backsliding and the political pain of the cuts would be pushed close to the next general election. But ministers are also weighing the dangers of cutting the wrong items if pushed to do so early and the risk that deep deficit reduction in 2011-12 could undermine the fragile recovery.

A decision on what is known in the Treasury as “reprofiling” the spending cuts has not yet been taken. An aide to George Osborne said on Wednesday that the spreadsheets underpinning the spending review did not factor in any reprofiling.

However, he added that he could not guarantee that the timing of the spending cuts would be exactly as laid out in June’s emergency Budget because the government needed to take a hard look at contracts and redundancy costs.

The Treasury insisted there was absolutely no change in the government’s economic strategy of eliminating the current structural deficit within a parliament, which David Cameron reiterated in his speech to the Conservative party conference on Wednesday.

But it would not confirm that the spending review on October 20 would maintain the £23bn spending cuts in 2011-12, rising to £83bn a year cuts by 2014-15. This week it has already become clear that many of the cuts will be difficult to start in 2011-12.

The withdrawal of child benefit from higher-rate taxpayers is set to be implemented only in 2013-14. The government cannot walk away from its existing defence contracts, such as the two new aircraft carriers, without penalties. The universal credit, to replace many existing benefits, will not start until late 2013 at the earliest. And plans to introduce higher tuition fees for students will not be ready until later in the parliament.

There is no doubt that most of the £32bn of spending cuts and tax rises set for 2011-12 will still be implemented, but the fiscal consolidation might be delayed without undermining the government’s ambition to eliminate the current structural deficit before the next election, scheduled in 2015.

Praising the “emergency Budget to balance the books in five years”, the prime minister acknowledged that cutting spending “will be difficult”, but sought to play down the damage stemming from cuts to departments of about 25 per cent.

Ben Broadbent of Goldman Sachs said that any move to delay spending cuts was unlikely to make “an enormous difference” to the economy or to Britain’s credit rating.

“If people were clear about the reasons for any delay [to spending cuts] rather than suspecting a political wobble ... I don’t think [investors] would change their mind about the risk premium on gilts,” he said.