The Spending Plan Explained

1) freeze the basic state pension and minimum income guarantee in 2016–17, then uprate with CPI

Spending on the state pension and pension credit has become unaffordable. The “triple lock” promise – that pensions will always rise by whichever is higher out of inflation, earnings growth or 2.5 per cent – made by the Conservatives before the 2010 election was irresponsibly profligate. It is doubly so to keep it now as spending is forecast to rise from £93 billion to £107 billion in 2019–20 (revised down ahead of the 2015 budget from £108 billion). Instead, the next government should ditch the policy and freeze pensions in 2016–17. Thereafter, they should increase them in line with inflation. This would save £10 billion by 2020–21, part of our programme to bring spending down to 31.7 per cent of GDP.

As part of our list of savings to meet the current government’s aim in the 2014 autumn statement of reducing spending to 35.2 per cent of GDP by 2019–20, we also assessed a less prudent policy. This would scrap the triple lock and increase pensions by inflation but not freeze them in 2016–17. We estimated that this would save around £6.8 billion.

2) raise the state pension age faster, to 67 by 2020

The government has recognised that the ageing population is leading to an affordability crisis for the state pension. The Pensions Act 2011 accelerated the increase in the state pension age and the effects on the exchequer will begin to be felt in 2016. By 2020, it will have risen to 66 for both men and women. The Pensions Act 2014 increased the age to 67, although this will not happen until 2028. While these reforms are a step in the right direction, they are inadequate.

Using estimates of monthly age cohorts by birth relating to people who will reach the state pension age under current rules up to 2020–21, we modelled how many new pension claims there would be each financial year. We then ran the same model assuming that the state pension age would be rising to 67 instead of 66. We multiplied the difference by Department for Work and Pensions forecasts of average state pension and pension credit payments to calculate an estimate of the difference.

We found that this would save around £2.2 billion in 2019–20. Fundamentally, it is difficult to defend why taxpayers should be told to fund decades-long retirements for healthy and fit people in their 60s at all, except for the fact that people have been promised state pension-funded retirements and made their plans accordingly, meaning there is an element of unfairness about removing that entitlement. Counteracting this, however, is the unfairness of telling taxpayers to pay for it, as an ever larger proportion of the population is aged over 65 and the average length of retirement gets longer.

The state pension age should be increased to 67 by 2020. It is beyond the scope of The Spending Plan to make recommendations for spending that will not have effect until after 2020–21. Nonetheless, policy-makers should not stop at 67, and they should not wait until 2026 before taking further action. The sooner such changes are announced, the more able those affected will be to adjust their plans if they would prefer to do so.

3) target free bus passes for the elderly on those who genuinely need them

In England, local authorities are currently given grants to provide concessionary, off-peak bus travel to eligible disabled people and eligible older people (those above the women’s state pension age).

Some authorities such as in London provide further concessions with those over the age of 60 granted free peak time travel on buses, trams, Underground, Overground and DLR.

Concessionary fares are the responsibility of the devolved governments of Scotland, Northern Ireland and Wales.

The requirement for local authorities to provide concessionary bus fares for older people should be abolished and the formula grant from the Department for Communities and Local Government reduced accordingly.

The grant would still be paid to local authorities to provide concessionary bus travel for claimants of disability living allowance, the personal independence payment and the attendance allowance (5 million people).

The cost of providing statutory concessionary fares to eligible older and disabled people was £1.087 billion in 2014–15, an increase of 1 per cent on the cost in 2013–14. After allowing for claimants of the above benefits, more than £500 million would be saved in each of the next six years.

4) abolish free TV licences - POLICY VICTORY!

Currently, those over 75 are eligible for free TV licences which ordinarily cost £145.50. This policy will cost £644 million in 2015–16, rising to £918 million in 2020–21. People over 75 (and over 65) are old enough to decide for themselves how to spend any money that the government decides to give them, so the politicians shouldn’t patronise older people by making spending decisions for them or attaching unnecessary labels to cash payments. Given the scale of the problem with the government’s accounts, taxpayer-funded "free" TV licences are an entitlement that we cannot afford.

If the BBC wishes to continue exempting over 75s from the licence fee, it could be financed from their budget but no increase in the licence fee should be approved.

5) means test winter fuel payments

The winter fuel payment is a tax-free annual payment to eligible pensioners. It is a cash payment that recipients can spend on whatever they please.

All recipients of pension credit (guarantee credit) would continue to receive the payment in full under this policy. In 2015–16 this would mean the poorest 17 per cent of pensioners receive the full payment. The payments range from £100 to £300 per annum so £200 has been used to calculate savings.

Pensioners with weekly income above the guarantee credit (£148.35 in 2014–15) will have the payment withdrawn so that only pensioners in the bottom third of the income distribution will receive winter fuel payments. The estimated spending on those who earn more than the guarantee credit level was calculated by subtracting the pension credit caseload from the bottom third of pensioners and multiplying the result by an assumed £100 each.

6) reduce the welfare cap to £20,000 - POLICY VICTORY!

Analysis of the coalition government’s £26,000 benefit cap showed that it led to increased employment levels in affected households. It is also by far the most popular of the coalition’s policies. To continue this progress the government should go further and reduce the benefit cap to £20,000.

A limit of £20,000 is still significantly above the national minimum wage which is around £13,000 for an adult over 21 working full time. It is significantly closer to national average post-tax pay, whereas the £26,000 cap is equivalent to a pre-tax income of over £34,000 in this tax year (2015-16). The government was right to argue that being on benefits should not pay more than average wages. That’s why they should reduce the cap so that it's not higher than the level of post-tax income for someone in work.

7 : abolish child benefit and increase the child element of the child tax credit

There have been efforts to ensure that better-off families stop receiving child benefit. George Osborne announced at the 2010 Conservative party conference that child benefit would be tapered away from individuals earning over £50,000 and withdrawn at £60,000. But there were problems with that policy which quickly came to light, not least that households with two earners who were on each on, say, £50,000 would keep the benefit in full. The Institute for Fiscal Studies showed how inefficient the proposals were in a 2012 report:

170,000 families could increase their net income if an individual in that family managed to lower their pre-tax income; a further 200,000 families could find themselves with a lower net income if their pre-tax income were to rise slightly. It would mean removing Child Benefit from some couples whose joint earnings were £43,000 but not removing it from other couples whose joint earnings were £84,000.

A more sensible option would be to integrate child benefit into the Child Tax Credit:

Combining child benefit with tax credits (or, from October 2013, with universal credit) would allow a more sensible withdrawal against the combined income of a couple, rather than against that of the higher-income individual. Consequently, it would lead smaller losses amongst one-earner couples and lone parents than the government’s proposal.

Once administration costs are taken into account, this measure would save more than £3 billion a year by 2020–21, assuming a consistent rate of increase in costs.

8) scrap the childcare subsidy programme named “tax-free childcare”

Under this scheme, the government will pay 20 per cent of the cost of childcare up to a maximum of £10,000, leaving parents to pay the remaining 80 per cent. With no more justification beyond the fact that 20 per cent happens to be the same number as the basic rate of income tax, the government branded it as “tax-free childcare”. The benefit parents receive is the same irrespective of whether their marginal tax rate is 20 per cent, 40 per cent or 45 per cent. In fact, the money is paid even if the parents are not even taxpayers. But the deceitful name is not why the subsidy should be scrapped.

This scheme does nothing to tackle the root causes of the high costs of childcare (see section 2.1.5 of the Spending Plan for further discussion), which are largely down to government policies in the first place. Things like heavy regulation of qualifications and stringent staff-to-children ratios have made childcare extremely expensive. But while it does nothing about the costs of regulation beyond transferring some of them from parents to taxpayers, it will cost an estimated £900 million by 2018–19. Over lifetimes, there is a large overlap between parents and taxpayers as groups of people, highlighting the wasteful and unnecessary “fiscal churn” that schemes such as this represent.

9) cut child tax credits to their 2003–04 level in real terms

The Institute for Fiscal Studies calculated that reversing the discretionary increases in the child element of the child tax credit since 2003–04 would save around £5.1 billion in 2015–16. We assumed that the fraction of forecast total tax credit expenditure in 2019–20 would be the same as 2015-16 to estimate that this would equate to a saving of around £5.8 billion in 2019–20.

That increase since 2003–04 was and remains unaffordable. The government should reverse it.

10) flatten housing benefit rates across expensive areas to cut 10 per cent off bills

Flattening housing benefit rates by reducing the number of ‘broad rental market areas’ (BRMAs) could significantly reduce housing benefit expenditure, particularly in London and the South East. There are over 150 BRMAs in England alone, and areas of high rent have disproportionately large numbers of housing benefit claimants. By determining rates over a wider rental market area, there would be lower benefit expenditure and less pressure in high-cost areas within regions.

Housing benefit rates should be flattened across the UK in order to reduce expenditure by 10 per cent. People who have to pay for their own housing frequently have to broaden their geographical sights to find somewhere suitable within their price range so it is not unreasonable for benefit claimants to be asked to do the same. Many of those who work in London are forced by high prices to look outside the city and commute. Housing benefit claimants should not be immune from this reality of life.

It was not possible to reliably estimate the effects of savings from a defined measure so we recommended that the Department for Work and Pensions investigates the data they have to estimate what extent of broadening could achieve a saving of at least 10 per cent of the housing benefit bill.

11) scrap contributory benefits

Contributory benefits are paid dependent on national insurance contributions. While a significant sum is spent on them, most of the expenditure would be replaced by equivalent benefits where eligibility is assessed on income. The Institute for Fiscal Studies estimates that scrapping contributory eligibility for jobseeker’s allowance and employment and support allowance would save around £600 million in 2015–16. Adding the forecast expenditure on maternity allowance and bereavement benefits brings the total to around £1.6 billion.

These benefits are paid to people who do not need them. It makes little sense to tax people and then hand those same people back benefits in the form of insurance against events that they could otherwise afford to insure themselves against if they wanted to. It would also make abolition of national insurance simpler.

12) reform planning rules to reduce housing benefit bills

The town planning system is dysfunctional and is imposing substantial costs onto property markets (discussed in section 2.1.4 of the Spending Plan). In turn, this is causing problems for businesses, whose operations are distorted by excessive commercial property costs leading to lower productivity and growth. But just as substantially, it is responsible for the substantial proportion of the housing affordability crisis. Green belt policies constricting London and other cities are warping their development and preventing the market from responding to demand from England’s rising population. The effect on prices and rents of this restriction might not be so powerful if developers could respond to rising demand by building taller buildings. But this, too, is largely prohibited.

Planning policies make tall buildings impossible in most locations and even effectively prohibit buildings just one or two floors higher than their neighbours in almost all locations, due to concerns about issues like oversight and disrupting the existing pattern of development or being out of keeping with neighbours. In some places, demand for space frustrated by restrictions on building “out” or “up” has turned to “down” into basements or “in” through filling in gaps between buildings and on large gardens back gardens between homes. Inevitably, these too have been prohibited (in the case of “garden grabbing” by the Mayor of London) or are being (in the case of basement excavations by some central London councils).

All this has predictable and disastrous effects on prices. And that in turn means on the housing benefit bill. We have estimated that a substantial relaxation of height restrictions and the green belt, if implemented in 2015–16, would save taxpayers £3.8 billion by 2019–20. We calculated this by applying Hilber and Vermeulen’s 35 per cent estimate of the house price fall that would occur after the complete removal of additional planning restrictiveness since 1974 to the housing benefit. This would mean a fully-realised saving of £9.4 billion but we assumed that it would take 10 years for the effects to manifest into a new equilibrium. For this reason, we assumed only 40 per cent of the saving would be available after four years.

The government should, at the least, adopt Professor Paul Cheshire’s suggestion to declassify from the green belt any land within 800 metres of a station. It should also amend national policy to prevent councils from refusing permission for buildings on account of their height if the proposed building is no more than two storeys taller than the neighbours, with the exception of conservation areas and areas of outstanding natural beauty.

13) abolish DECC and reassign necessary functions - POLICY VICTORY

Department for Energy and Climate Change could be scrapped with several of its functions moving into other departments. The Nuclear Decommissioning Authority should move into the Department for Environment, Food and Rural Affairs as along with the expense of decommissioning Sellafield, which accounts for a large proportion of DECC expenditure. Likewise, the Office for Nuclear Development and Carbon Budget Programme should also move with them. The Global Threat Reduction and nuclear security programmes, meanwhile, could move into the Home Office.

But some functions should be abolished. The Official Development Assistance is a form of aid and should go. However, the expenditure for this is already accounted for in the proposal to scrap development aid and therefore is excluded from our savings calculations for abolishing DECC. The fuel poverty programme should also be scrapped. As the government spends less, there could be cuts in fuel duties which would reduce fuel poverty. The green deal should be scrapped as it is not the purpose of the government to lend to individuals for home improvements. The innovation programme is unnecessary. Private finance sources should be left to carry out its functions without taxpayers being told to fund or underwrite them. The renewable heat incentive would be removed as it subsidises uneconomical energy sources. Funding for the energy and markets reform programme should be scrapped, as its stated aim is to ensure supply and affordability. The carbon capture and storage programme which works with the private sector to develop capture technologies should be funded privately, too. The community energy savings programme has been closed but still has costs over £2 million.

The “heat and other programmes” expenditure should also be scrapped. These measures would save over £320 million rising to over £380 million in 2020–21.

14) repeal the Equality Act 2010

According to its impact analysis, the Equality Act 2010 has an estimated annual cost to both the public and private sectors of up to £70 million. This law should be repealed as it places burdens on small businesses to familiarise themselves with the law and to ensure that they act in compliance with it causing a loss in productivity. This is also the case in the public sector where the annual cost is estimated to be between £7 million and £41 million.

The impact assessment made for the Act suggests that each of the 25,612 public bodies would be expected to have a personnel manager under whose remit the implementation of the Act falls. The average wage for such a person is expected to be £25.13 and assuming a 38 hour working week the total remuneration for one person at each of these bodies in one year would be close to £1.3 billion. Given this, it seems to be an underestimation that the act would only cost the public sector £7 million per year, equivalent to slightly over 0.5 per cent of these employees time. Thus we have taken the highest estimate for costs.

The costs (if grown in line with CPI inflation) would be £49 million in 2020–21. As already stated this is likely to be a gross understatement, and does not include the costs to the private sector.

15) return the compulsory school leaving age to 16 and scrap 16–19 bursary scheme

Education policy aimed at 16–19 year olds must change.

For some time we have pushed children into A-Levels and towards university when it has not been suitable for all of them. A target of 50 per cent of school-leavers attending university has been scrapped, which is welcome as it was misguided; it demonstrated that we didn’t take manual qualifications and apprenticeships seriously enough and it stopped some students from entering the workplace when that may have been the better option.

Scrapping the education maintenance allowance was the right thing to do in the long term and we should also abolish the 16–19 bursary scheme. Returning the compulsory school leaving age to 16 would allow some students who would prefer to pursue employment, work experience or another form of qualification to pursue their goals.

16) cut the number, scope and budgets of quangos and public bodies

The coalition government’s promised bonfire of quangos did not reduce the number or scope of quangos as much as was hoped or as much as was necessary. There are still too many unaccountable and expensively-managed quangos. There needs to be a serious and systematic rationalisation of both the functions and continued existence of each public body.

Currently, there are over 400 such organisations and the government should disband some and move some others into a ministerial department to make efficiency savings. This would create savings by removing unnecessary functions and by increasing efficiency through reducing duplication of back-office operations.

The measures listed below should save almost £400 million annually by 2019–20. This is not an exhaustive list . (See policies 13, 14, 27 and 29 for further examples of bodies covered by The Spending Plan but which are accounted for separately.) The government should instigate another review of public bodies, this time with tougher criteria. But is indicative of what could be achieved, bringing further savings.

17) cut the pupil premium to its 2011 level

The pupil premium announced in 2011 consisted of a £625 million allocation for children who were registered as eligible for free school meals and had been looked after for 6 months or longer.

This was extended in 2012 to all those eligible for free school meals at any point in the previous six years, meaning that a pupil whose parents with a significantly improved financial situation still qualify. The cost of the scheme has since extended to over £2.5 billion for a variety of disadvantages.

The pupil premium should be awarded to schools dealing with currently disadvantaged pupils rather than those who have perhaps been qualified as disadvantaged in the past. This is particularly important at a time when evidence of significantly increased pupil attainment as a result of the fund remains in doubt.

It takes years for changes in the education system to be demonstrated in results and attainment, so policymakers should exercise caution when using taxpayers’ money to expand relatively new schemes.

Returning to 2011 levels would ensure those schools with the most disadvantaged pupils are still given additional help.

18) replace grants to local authorities with devolved taxes

The UK has one of the most centralised tax systems in the developed world.

In 2013–14, only 25 per cent of taxpayer funding for local authorities came from council tax with the balance coming from central government grants. To limit the extent to which central government collects taxes from individual areas and churns it though its bureaucracy only to return it to the areas from which it came, the 2020 Tax Commission proposed that at least 50 per cent of all tax funded expenditure by local authorities should be raised from local taxation.

Reducing central government grants as a percentage of local authority revenue expenditure by 4 percentage points each year from 2015–16 would make local authorities responsible for raising 50.7 per cent of their revenues by 2020–21. There is an abundance of empirical evidence showing that public sector efficiency increases with fiscal decentralisation.

An econometric study from the German CESifo Group (download the paper) looked at 21 OECD economies between 1970 and 2000 and concluded that:

1) Government efficiency increases with the degree of fiscal decentralisation. This result appears to be robust to a number of different specifications and fiscal decentralisation measures.

2) A 10 percentage point increase in local and regional governments’ share of total national tax revenue improves public sector efficiency by around 10 per cent.

The proposal would increase local government’s share of current receipts from 3.7 per cent to 7.5 per cent – a 3.8 percentage point increase. This in turn should lead to savings from greater efficiency worth £4.9 billion in 2019–20 which should be subtracted from the government’s grants to local authorities.

19) amend repayment terms on student loans

There is a good case for taxpayers to be asked to underwrite a loans system for students in higher education to promote participation, a more educated population and a more skilled workforce.

However, this case becomes less strong when the case is for a particularly generous system that, in effect, tells all taxpayers, including uneducated ones on low incomes, to pay more tax so that educated graduates can enjoy a generously subsidised repayment regime.

The cost of subsidised interest on student loans is forecast by the Office for Budget Responsibility (OBR) to be £4.9 billion next year. The Institute for Fiscal Studies (IFS) calculated the impact of amending the terms of the new loans system on the net present value of the whole lifetime of the loans for a cohort of 300,000 students. We used these estimates to calculate the potential savings by implementing similar measures on existing loans.

In total, we estimated that all three measures would save around £2.7 billion, once we adjusted for the differences between the proposals the IFS assessed and the ones we have recommended, and further adjusted them to account for overlaps.

The estimates for the three individual measures are:

Raise repayment rates from 9 per cent to 15 per cent. We estimated that this would save around £1.4 billion a year.

  • Cut the repayment threshold from around £18,000 to £15,000. We estimated that this would save around £700 million a year.

  • Raise the interest rate from RPI to RPI plus 3 per cent. We estimated that this would save around £1.3 billion a year.

20) freeze benefits for two years then uprate with CPI

Benefits are usually uprated with inflation measured by the consumer prices index in the preceding September. However in 2013–14, 2014–15 and 2015–16, the uprating of most working age benefits, excluding disability benefits, has been limited to 1 per cent.

However earnings growth in these years has been weak and lower than the change in CPI.

For 2015–16, the CPI in September 2014 increased by 1.2 per cent whilst average weekly earnings increased by just 0.6 per cent. Even by limiting the uprating to 1 percent, working age benefits are still set to increase by more than they would have had they been uprated in line with earnings.

This both disincentives work and is unfair on those in work and not claiming benefits.

Working age benefits and tax credits should be frozen in 2016–17 and 2017–18 and then uprated by CPI, the increase in which is forecast to be lower than that in average earnings over the forecast period.

21) stop paying over the odds to borrow money

National Savings and Investments (NS&I), the state-owned savings bank and investment organisation, has traditionally been a cheap way for the UK government to finance its borrowing requirement. Given that that NS&I is 100 per cent backed by the government, their deposits and savings products are considered safer than those of commercial banks so interest rates are usually low. It has often been cheaper for the government to borrow through NS&I than the gilt market.

However NS&I has increasingly been used by the government as an electioneering tool. This is best illustrated by the recent sale of £7.5 billion worth of “65+ guaranteed growth bonds”, more widely known as “pensioner bonds”. The one and three year pensioner bonds pay an annual interest rate of 2.8 per cent and 4 per cent respectively.

By comparison, on 11th February 2015, the Debt Management Office held and auction in which it was able to sell £1.75 billion of conventional 3.5 per cent Treasury gilts with a maturity date of 22 January 2045.109 They were able to sell the gilts for as much as £124.52 with bids exceeding the allotment 1.58 times over. Because the DMO was able to sell the gilts for more than their par value, the yield to maturity at average accepted price was significantly lower than the coupon rate – just 2.358 per cent.

Simply put, the government was able to borrow more cheaply for 30 years on the gilt market than it chose to from pensioners for one year.

Some of the products sold by NS&I are needlessly increasing borrowing costs and undermining commercial banks and other financial services providers.

Savers have a wide range of investment products like ISAs and savings accounts. So given that government can able to borrow cheaply on the gilt market, the Treasury should stop accepting new deposits and selling bonds through NS&I.

Interest should continue to be paid on existing investments and all bonds with maturities should be honoured.

22) withdraw funding from the CAP and continue subsidies directly for British farmers

The common agricultural policy (CAP) pushes up the price of food for consumers. (See section 2.1.6. for further discussion of the CAP and food prices.) It also shuts out large swathes of the developing world from free trade, meaning we subsidise farmers in Europe while keeping farmers outside of Europe poor.

This costs taxpayers twice, as the EU gives out a significant amount of money in aid to subsistence farmers to try and compensate for the protectionist policy. In a research paper for the TaxPayers’ Alliance in 2009, Lee Rotherham found that the CAP cost the UK £10.3 billion, or £398 per household. 111 British farmers get a raw deal from the CAP too, with more farmland than some recipient countries but fewer grants.

Pulling out of the CAP, spending the money agriculture already receives and cutting our fee to the EU in proportion to its spending on the CAP would save around £2.8 billion a year.

23: stop prescribing branded medicines where cheaper generics are suitable

Doctors and prescribing nurses too often write prescriptions for drugs that are cheap and available to buy off the shelf in pharmacists and supermarkets, such as paracetamol. However, there is a significant cost to taxpayers every time that a prescription is written and administered. Given that the majority of prescriptions written are free for the user – but paid for by taxpayers – there is very little concern about the cost of providing drugs like paracetamol via traditional prescriptions. What can make this process even more expensive is when patients are prescribed branded medicines when there are cheaper generic alternatives available, which are just as effective. In evidence to the Commons Health Committee, the British Generic Manufacturers Association estimated it to be £140 million.

It is worth noting that the opposite can also sometimes be true – generic drugs can sometimes be more expensive than branded alternatives. Much more has to be done to provide the most effective drug, both in how it will help the patient and how it will cut costs. The NHS should implement systems to ensure that prescribers have to actively choose a more expensive alternative and that the practice, not the NHS, pays the premium when there is no medical reason for it.

24) abolish rail operator subsidies and increase premiums by 33 per cent by deregulating fares

The Department for Transport’s rail operating subsidies ranged from £355 million for Northern Rail to the premium South West Trains paid of £312 million in 2013–14. Measured per passenger mile, it ranges from 25.8p for Northern Rail to a premium from First Capital Connect of 8.5p. We propose that for operators where a subsidy is paid that the subsidy is eliminated. We also propose that where a premium is collected that this is increased by at least 33 per cent.

If a railway cannot cover its operating costs, taxpayers should not be told that they must part-pay for passengers’ journeys instead. To make up the difference, the train operating companies should be given more freedom to increase fares and change their fare structures to take advantage of yield management techniques and to let prices reflect the fact that rail capacity is much more scarce at peak times than it is off-peak. Additional revenue from higher fares could improve benefit: cost ratios for transport projects in some areas where it exceeds the cut in subsidy or the increase in the franchise premium.

These proposals do not apply to the network grant made to Network Rail.

25) scrap operating subsidies to TfL - POLICY VICTORY

Transport for London plans indicate that it is expecting operating grants to fall from £874 million to £704 million in 2015–16 before rising steadily to £756 million in 2019–20. Meanwhile, it expects its fares income to rise steadily from £4.3 billion in 2014–15 to £6.3 billion in 2019–20.114 With buses and trains packed full of commuters, taxpayers should not be expected to fund the operating costs for its networks. If it can’t break even when its services are straining at capacity, which many are, then that tells the observer something about how well-matched or otherwise supply and demand are.

Gradually, spread over four years starting in 2016–17, the Department for Transport should eliminate operating grants to TfL. It should be expected to find the difference through efficiency-saving cost reductions if possible and if not through fare increasing or service cuts. By 2019–20 this would save over £750 million.

26) abolish the bus service operators’ grant

The bus service operators’ grant (BSOG) – previously known as the fuel duty rebate– refunds bus operators for the bulk of their fuel duty costs. The subsidy was intended to keep bus services commercially viable, but evaluations of the programme consistently recommend bringing it to a close. In its response to a public consultation on the issue of local bus services, the Local Government Association concluded that:

BSOG is not well focused on the achievement of public policy objectives…it does not encourage efficient use of fuel or cleaner, greener vehicles, nor is it related to tackling congestion, driving up patronage, improved performance, better quality services or improved accessibility.

Oxera, an economic consultancy, reflected that abolition of BSOG was central to improving the value of taxpayer support for bus services. The Government’s own Commission for Integrated Transport has lobbied hard for reform of the subsidy.

Although fuel is a considerable cost for bus operators, other taxpayer subsidies to the industry already address many of the public’s concerns about bus services (particularly the continued provision of rural routes). BSOG should be scrapped, and efforts concentrated on reducing the cost of fuel for all road users.

27: abolish DfID, scrap development aid and transfer humanitarian responsibilities to the FCO and MoD

Hernando de Soto wrote in his 2000 book The Mystery of Capital that if America met the obligation to spend 0.7 per cent of national income on overseas aid, it would take 150 years to exceed what the world’s poorest had in savings. Global remittances– money transferred home by workers overseas – are set to hit $516 billion in 2016, according to the World Bank.

The developing world is growing at an astonishing rate. The removal of trade barriers and an embrace of free markets means that countries in Africa, Asia and South America are growing very rapidly. The Pew Research Center, based in the United States, undertook an international survey in which almost 50,000 people were questioned in 44 advanced, emerging and developing countries. The results were that a clear majority of the world wants more freedom to trade and grow.

But the money given out by the Department for International Development generally doesn’t deliver more freedom. A study by the TaxPayers’ Alliance found that foreign aid spending has no bearing on the freedom of ordinary people, the press or business in developing countries.

The focus should be on ensuring that trade barriers are removed rather than self-importantly believing increasing our aid budgets is the answer, no matter how well-intentioned. As a rich nation, we can – and do – play a significant role in assisting in disaster zones, including medical disasters. But when many emerging economies are forecast to overtake traditional European powerhouses in the course of this century, we should make sure any money we send overseas is targeted in the right areas rather than misspent on development projects that do not deliver.

The burgeoning aid industry too often confuses inputs with outcomes. For example, a report from the Independent Commission for Aid Impact (ICAI) found that a £1 billion education programme in east Africa, funded by DfID, did not greatly improve the educational outcomes of the children there. That is simply not good enough.

Another ICAI report found that projects funded by UK aid are pushing both poor and rich alike “towards corrupt practices.” The chief commissioner of the ICAI in full said in the report:

We saw very little evidence that the work DfID is doing to combat corruption is successfully addressing the impact of corruption as experienced by the poor. Indeed, there is little indication that DfID has sought to address the forms of corruption that most directly affect the poor.

While departmental budgets are facing necessary restraint in the UK, the DfID budget is set to be locked to the same arbitrary, unsustainable and ideological target of 0.7 per cent as mentioned above. In 2019–20, 0.7 per cent of forecast national income will equate to £15.5 billion. Abolishing that spending while allocating £1 billion for humanitarian efforts would save taxpayers £14.5 billion.

In order to get real and drastic tax reform, substantial savings must be made. Scrapping DfID and moving responsibility for disaster relief into other departments would refocus our spending priorities and ensure that British taxpayers’ money is not wasted on vanity projects, lost to fraud or corruption, or spent on other schemes which simply do not deliver results for the very people they are designed to help.

28) abolish BIS and reassign necessary functions - POLICY VICTORY

The secretary of state for business, innovation and skills, Vince Cable, was right when he said the department should be scrapped, before he took office in 2010. A number of functions should remain, however, and be moved into other departments. The Turing Institute, the Crick Institute and other research-intensive operations should be moved into an expanded Department for Education and Skills, along with the funding councils for higher and further education. The Better Regulation Executive should be kept and moved into the Cabinet Office.

Some of the more useful business support services could be tendered out to organisations such as the Institute of Directors or the British Chambers of Commerce, which are closer to on-the-ground businesses than a remote Whitehall department. We have estimated that these remaining programmes, to be run through a skeleton staff moved into the Cabinet Office to monitor the tendering process, would require around 20 per cent of their existing spending.

A number of non-departmental public bodies would not be missed. InnovateUK, formerly the Technology Strategy Board, and the Green Investment Bank, are unnecessary and are only useful for funding projects which private sector investors consider to be poor value or too risky. Similarly, instead of giving money to the Regional Growth Fund to distribute to well-connected businesses, taxes should be cut. A government that followed this plan in full would be able to implement the recommendations of The Single Income Tax, including abolishing corporation tax and both employees’ and employers’ national insurance.

Britain’s patchwork of business groups, from the CBI to the Institute of Directors and the British Chambers of Commerce, have developed local, regional and national networks to represent their members to decision-makers. The Local Enterprise Partnerships replicate these groups, not just squeezing out the business groups but often dominating local politics in a way that they were never intended to. The Local Growth Fund should also be scrapped.

We estimate savings of around £4.5 billion annually could be made from abolishing BIS.

29) abolish DCMS and transfer Royal Parks and heritage functions to other departments

According to a report by The New Culture Forum, more public installations and sculptures were opened in the 1990s and 2000s than in the entire preceding century. But the state cannot fairly decide which arts projects are worthy of funding, and which are not.

Philip Davies, the MP for Shipley, found out that the Arts Council was on track to spend £347 million on opera during the 2010–15 Parliament but only £1.8 million on brass bands. Other reports suggest that until recently, 50 percent of Arts Council funding was spent in London.

That gives the impression that arts funding is just as liable to be captured by more powerful vested interests as any other form of subsidy. Local and more niche art projects do not get the same support as something like opera, which could fund itself through private donations and ticket sales as it has done throughout its history.

There is, of course, historical precedence for high quality arts being provided by the private sector and by people who pay for tickets. The Arts Council was established by Royal Charter in 1946: are we really to argue that a thriving and vibrant arts scene did not exist in the UK before this time?

Technology should play a major role in how artists seek to fund their activities. Crowd sourcing websites are increasingly used to obtain the cash to pursue an artistic project, and bureaucrats at quangos or in departments shouldn’t crowd out such innovations.

Some items of DCMS spending, such as free entry to museums, are arguably harder to justify scrapping. But quite often, many of the people visiting such venues would have done so anyway without subsidy. If museums or galleries want to encourage groups of schoolchildren to go for free, or extend opportunities for visitors who might not otherwise be able to go, then they should re-introduce charges and do that out of their budgets. We have estimated that £2.7 billion could be saved by abolishing the department while retaining an allocation of £30 million for heritage bodies.

30) scrap universal free school meals

The plan to provide free school meals for all infant school pupils in reception, year 1 and year 2, and disadvantaged pupils in sixth form colleges, was beset by problems from the very start – not least when it was pointed out that many schools did not have the appropriate catering facilities to deliver the policy. The Office for Budget Responsibility has forecast spending at £620 million in 2014–15, and £755 million in 2015–16. After adjusting for inflation and forecasts for the growth in the number of primary school pupils, we estimate spending will have risen to around £830 million by 2019–20.

It is nonsense to provide the children of rich parents with “free” school meals, especially – as with all universal benefits – it requires subsidy from those on low incomes through tax. Children of parents on income support, income-based jobseeker’s allowance, income-related employment and support allowance, the guaranteed element of pension credit, child tax credit or universal credit are already eligible for the meals. If a stigma exists around those children on free school meals at certain schools, it should be beholden upon teachers to think innovatively to reduce it – perhaps through a token system – and to address bullying directly. It is also unclear why that stigma is not supposed to be important in year 3, when free school meals are again means-tested.

31) establish an excess sickness rate penalty to bring public sector sickness absence rates into line with the private sector

The ONS report, Sickness Absence in the Labour Market, shows that 2.9 per cent of working hours were lost to sickness in the public sector in 2013, compared to 1.8 per cent in the private sector. When broken down further, public sector health organisations lost 3.4 per cent of working hours, central government 3 per cent and local government 2.7 per cent. There are several underlying factors – those working in healthcare are more likely to be exposed to illnesses, for instance.

(Image taken from ONS report)

But when these figures are adjusted for workplace size, hours worked, age and region of the UK, sickness in the public sector is 24 per cent higher than the private sector. And the gap remains stubbornly high. Public sector productivity has picked up since 2010 as the overall headcount has decreased, but tackling excessive sickness rates compared to the rest of the economy would boost it further still. This would deliver better value for money.

There should be greater accountability in public sector organisations, with more stringent reporting requirements, doctor’s notes where applicable and tougher sanctions for those found to have been dishonest about a sickness absence. A penalty should also be introduced for public sector organisations that break average rates without reasonable explanation.

32) cut annual leave entitlements where overly generous

A 2013 survey of almost 200,000 employees of 208 organisations and 391 employee groups found that the median holiday entitlement for public sector workers is 27 days compared with 25 days for manufacturing companies and public sector services organisations.

Despite some restraint in public sector pay in recent years, public sector employees still enjoy a significant pay premium over their private sector counterparts, especially when defined benefit pension schemes are included.

Given the higher pay and greater job security in the public sector, there seems little justification for more generous holiday arrangements.

Average annual leave entitlements should be brought into line with those in the private sector by capping annual leave at 25 days, plus the 8 Bank Holidays.

Doing this would mean a saving of around 0.9 per cent of the public sector pay bill which HM Treasury currently puts at £164.4 billion.

33) scrap national pay bargaining

Moving towards greater regional differentiation of public sector pay would save money in two key ways:

  • In low-cost regions, staff wouldn’t have to be paid excessive salaries. Public sector staff in London are paid a small premium but given the much lower living costs, many staff outside London are often significantly better off than those doing the same job in London.

  • In high-cost regions, organisations wouldn’t have to hire expensive agency staff unnecessarily. In the NHS in particular they are often used because in richer areas with higher costs of living, trusts struggle to recruit the staff they need while offering national pay rates. So they hire agency staff where pay isn’t restricted. But that can have other adverse effects beyond the additional expense of hiring agency staff instead of permanent employees.

Introducing local or individual pay bargaining would also have two important beneficial side effects:

  • It would reduce the crowding out of the private sector in poorer regions.

  • It would improve standards and even save lives in richer areas of the country. With the cost of living much higher in the South East but pay for healthcare staff, for example, not sufficiently different to that in regions where the cost of living is lower, standards are compromised. A study for the London School of Economics found that centralised pay bargaining was having a significant effect on heart attack death rates. For a 10 per cent rise in wages outside the health service (a 10 per cent richer area), the heart attack death rate went up by between 4 and 8 per cent.

In 2012, Policy Exchange estimated the saving available at £6.3 billion. After adjusting for the Office for Budget Responsibility’s forecast for decline in the public sector pay bill, we estimate that this saving would fall to around £5.8 billion by 2020. Big public sector unions are extremely attached to centralised pay bargaining for obvious monopsonistic reasons. It also gives national trade union leaders prestige and importance. But tackling this problem has to be part of a package of reform to make public sector pay and pensions more affordable for taxpayers.

34) scrap trade unions’ subsidies of facility time, grants and office space

Trade unions should be voluntary bodies of members and they should look to their members for financial support, not taxpayers. Unions are subsidised through direct funding and through paid staff time within public sector bodies.

TaxPayers’ Alliance research has revealed that the cost of this has been over £100 million per year in recent years. The level of subsidy is now declining and the measures to limit the worst excesses are welcome but further action is necessary. Taxpayers should not be asked to fund any union activity and union members would enjoy more responsible unions if they had to rely on them and them alone for their finances.

Eliminating grants and facility time would save over £90 million a year in these costs. Further uncosted savings could be available from the reclamation of office space and equipment that is currently used by union officials, but we have not been able to estimate the extent of this.

35) shrink grants to Scotland, Northern Ireland and Wales in line with England and cut Scotland’s grant to match its relative prosperity compared to Wales

The Barnett formula ensures that public spending per head is higher in Northern Ireland, Scotland Wales than it is in England. It is outdated and unfair, with Lord Barnett himself saying the policy is flawed.

The reality is that the Barnett formula cannot possibly survive. It is little more than a crude back-of-the-envelope rule for splitting annual increases in public spending, drawn up back in 1978 – a short-term expedient. It was never designed to last for thirty years and to bear the public scrutiny and resentment it now engenders. Further detail on this can be found in a paper for the TaxPayers’ Alliance authored by Mike Denham.

In the meantime, more must be done to restore fairness to the distribution of public sector spending. In 2012–13, public spending per head in Scotland was £10,152, while in England it was £8,529. That means somebody living in the North East region of England received £1,623 less in public spending than another person over the border in Scotland.

Our first proposal, as part of the menu of savings to achieve the OBR’s forecast of spending to GDP in Autumn Statement 2014, recommends that Scotland’s grant should be cut to reflect its prosperity relative to Wales, which compared to England is three times poorer than Scotland. We estimated that this could save around £4.4 billion in 2019-20. For more substantial savings, Scotland’s grant should be cut to reflect its prosperity relative to Wales with further reductions to grants for both Wales and Northern Ireland, as well as Scotland, in line with total managed expenditure. We estimated that this could save £8.7 billion in 2019-20, rising to £10.4 billion in 2020-21.

36: increase the extent of charges in the NHS

The current model for funding the NHS is unsustainable in the long-term. As countries become better off, they spend more on healthcare as people live longer and technology improves. As outlined later, the NHS itself must undergo substantial reform to make it affordable in the long-term, but more immediately we must look at ways of paying for the growing costs of healthcare outside of general taxation. The think tank Reform proposed a comprehensive set of proposals to introduce charges for certain NHS services, such as prescriptions and GP appointments, from which those on low incomes could be exempt.

In France, for instance, GP appointments are charged for and then those on benefits can claim back the costs later. Introducing a price mechanism, even if the money is refunded, will help people to realise that healthcare is expensive and that nothing is "free".

Reform estimated in 2013 that their proposals could save around £3 billion a year. We estimate that the savings would be around £9 billion by 2020, due to a combination of larger budgets, tighter eligibility criteria for exemptions and higher charges.

  • £10 prescription charge. By abolishing all exemptions from prescription charges except for low income groups (we estimated that 30 per cent of prescriptions would remain exempt) and applying a £20 charge, by 2019–20 the NHS could save £5.4 billion a year.

  • £20 flat-rate GP consultation charge. We doubled Reform’s 2013 estimate of a £1.2 billion saving with a £10 charge and increased it in line with inflation to estimate a saving of £2.7 billion by 2019–20.

  • £20 daily “hotel” charge for overnight hospital stays. We estimated that the NHS could save £442 million by 2019–20.

  • £25 fine for missed outpatient hospital appointments. We estimated that the NHS could save £465 million by 2019–20 comprised of £200 million in fine revenue and £265 million in fewer wasted appointments.

37: raise the efficiency of NHS estates to match the top 25 per cent

The amount of unused floor space on the entire NHS estate is equivalent to that used by nearly 14 trusts, according to the building consultancy EC Harris. They calculate that the NHS could save £3 billion a year by making better use of its vast estates and facilities, matching the efficiency of the top 25 per cent of trusts.

Savings that big would offer significant relief to trusts struggling with the increasing cost of delivering healthcare, and must surely factor as a key strand of meeting the £20 billion efficiency savings highlighted by the Nicholson challenge. NHS management must, as a matter of urgency, start to make better use of their existing property to save money and boost productivity. Staff within NHS trusts should be involved in this process, as they will no doubt have the best idea of what works and what doesn’t.

We have estimated that £3.6 billion could be saved by 2019–20 after adjusting for growth in the overall budget.

38) reform patient list auditing to cut NHS "ghost patients" - POLICY VICTORY

In response to a written question from Valerie Vaz MP in 2013, health minister Norman Lamb revealed that in 2012 there were more than 55.7 million general practitioner registered patients in England, 104.2 per cent of the population.

Ghost Patients in the NHS

GP surgeries receive an annual payment for each patient registered with them, so clearly some are getting more funding than they should be.

There are a number of reasonable explanations for why patients may remain on registers for a period of time after they otherwise should. They may change surgery, emigrate or die without the surgery being made aware. But a system which allows more than 2.2 million more people to be registered than there are in the country is clearly deeply flawed and in need of reform.

It would be unreasonable to expect the number of registered patients to exactly match the population at any given point in time, but introducing a system which brings the number of "ghost patients" down to 101 per cent of the population is both achievable and desirable.

39) renegotiate contracts to cut excessive pay for GPs

Reforming GP contracts by implementing a review of the quality outcomes framework, minimum practice income guarantee, the senior factor payments and the dispensing doctors’ fees could help bring the cost of GPs down to a more affordable level.

The OECD’s Health at a Glance 2013 report revealed that UK general practitioners are paid 3.4 times the average wage, while those in Belgium are paid just 2.3 times average earnings. By bringing English GP pay into line with Belgium’s, whose healthcare system is highly regarded, over £1 billion could be saved.

It is anticipated that any review could not achieve the full saving in the first year but would be achieved through gradual reform until 2020–21.

For our previous blog on GP pay with further facts and figures see here

40) scrap HS2

HS2 should be scrapped. It was based on a bad business case that has continued to unravel since it was first presented. For instance, the costs and benefits of the project were calculated on the basis of zero productivity on trains – in other words, it assumed that passengers don’t do any work on their commute. This is clearly untrue and puts the assumptions on shaky ground. Furthermore, the initial business case assumed average passenger income of around £70,000. If this materialises, then the project is quite openly a high speed rail line for well-off passengers paid for by less well-off taxpayers.

The stated case for HS2 has also morphed over time, as politicians found their arguments wanting. The project was initially about quicker journey times. Then it became about capacity, which again was debunked.

The case then moved on to argue that HS2 would rebalance the economy between North and South, and help drive regeneration in the North. But the precedent for such claims is unfavourable. The Institute of Economic Affairs examined what has happened since high-speed services were introduced in east Kent as part of HS1, and the region has actually performed worse in terms of employment than the rest of the South East and the rest of Britain.

The case is now being made that HS2 will free up capacity for freight. But this will not happen to any significant degree until 2026 at the earliest. Not only that, HS2 could damage freight capacity on key parts of the rail network. On the southern section of the West Coast Main Line, for instance, it is possible that freight trains will continue to operate on the ‘slow lines’, together with semi-fast and stopping passenger trains. That would not free up any useful additional freight capacity.

The stated costs – above those calculated in this report – could also escalate significantly. The Treasury has said that the government will spend £4 billion on HS2 in 2019–20 and £4.5 billion in 2020–21. These are the figures we used to calculate savings. But another Institute of Economic Affairs report found that councils, transport bodies and local business groups are lobbying central government to fund other projects along the route. Along with other new costs not accounted for in the business plan, the total cost could reach £80 billion.

There are far more worthwhile transport projects. Easing congestion around commuter towns and increasing capacity on existing lines would be cheaper and preferable. Furthermore, the benefit per pound spent is usually better on road projects than rail. New technologies will make HS2 redundant by the time the first train is due to leave Euston, too, not least the development of driverless cars.

HS2 is a bad project and it is unaffordable. It should be scrapped now for a significant saving.

41: abolish the Christmas bonus

The Christmas bonus was introduced in 1972 and is given to claimants of certain benefits in the run up to Christmas. At present it is a one-off, tax-free payment of £10. Christmas can be a costly period for many people but the government should instead look at its own interventions and the impact they have on the cost of living. High taxes on consumer products, for instance, often make up a significant proportion of the cost. Over 70 per cent of the cost of petrol for those wishing to drive to see relatives in the festive period is tax. Taxes on drinks to see in the new year range from 50 to 70 per cent.

The administration costs of benefits like this are too high and as part of a broader reform, payments like this should be abolished to save money and simplify the system. The overall bill is around £150 million a year, so scrapping it will deliver a significant saving.

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