More tax cuts will endanger public services

The Financial Times this morning has a story that Jeremy Hunt is considering further cuts in public expenditure to make room for tax giveaways to boost Tory election hopes.   As the Pink 'Un notes, Hunt's current plans to increase public expenditure by just 1 per cent would imply real cuts.

We are surrounded by examples of deteriorating public services in 'broken Britain'.  Many people cannot access NHS dental services and have had to extract their own teeth.  There is a huge backlog in the courts and buildings are in such a poor state that trials have been delayed.  Even well-run local authorities don't have enough cash to meet their statutory duties. 

Of course, Hunt is setting a trap for Labour who, apart from some modest increases, have pledged not to increase taxes.   The tax burden is at its highest for a very long time, but it is very difficult to see how needed improvements in public services can be funded.

Unfortunately, voters can't have it both ways: lower taxes and better public services.  With the economy in a technical recession and generally flat lining there is no medium-term path out through growth.  As a report from Goldman Sachs make clear, Brexit has hit GDP.

It is possible that interest rates will start to fall and this will reduce the very high cost of servicing the public debt.  About a quarter is index linked and new gilts are being used at higher rates than previously.

Kicking the can down the road doesn't help with the the PFI contracts favoured by New Labour coming home to roost with schools having to over pay for maintenance.

Who would be a decision-maker?

The effects of an ageing population

The Office of Budget Responsibility has published the results of analysis of the long-term effects of an ageing opulagtion: Ageing

The headline conclusion is that further public spending cuts or tax rises will be needed after 2016-17. The pressures are estimated to be so great that a tax rise of 1.5 per cent of national income would be needed in 2016 to put public sector debt on a path to return to 40 per cent of national income by 2060. Such a rise would be equivalent to increasing value added tax to 24 per cent.

Ageing has little effect on taxation but would raise public spending by 5.3 per cent of national income. These rises would start in the 2020s and are driven by a sharp increase in the costs of health care, state pensions and long-term care. However, it should be noted that Britain's likely burden from ageing was no worse than in the US and better than in many European countries.

However, the OBR does assume relatively modest rises in health spending which seems somewhat unrealistic given the pressures that arise from advances in medicine. If the rate of growth of health spending was closer to the historical average, it would take up another 5 per cent of national income by 2060.

There are real intergenerational justice issues here, but people have a strong sense of entitlement to benefits in old age. Moreover, older voters have a much higher propensity to vote that younger voters, approaching 70 per cent.

Contradictory expectations

In the latest issue of British Politics Peter Dorey shows that the electorate was opposed to every conceivable tax increase at the time of the general election by a large majority. Equally they tend to be opposed to specific cuts in public expenditure that affects them.

Listening to the vox pop from Oldham East and Saddleworth this morning, one interviewee was against the rise in university tuition fees but also against the rise in VAT. Another respondent wanted more spent on the NHS.

Unfortunately, every government that comes into office wants to reorganise the NHS, imposing big transition and disruption costs without necessarily improving the standard of patient care. What the Government has unfortunately been unwilling to tackle is a different model for delivering public health care: for example, competitive insurance provision as happens elsewhere in Europe.

What never seems to be mentioned in these discussions is the changing economic and political balance of power in the world. This is not the 19th century or even the early 20th century when Britain was top dog. Transitions to a new balance when there is no undisputed hegemon are not easy to manage.

As for the by-election, I think there will be a low turnout and Labour will hold the seat with an increased majority. This will encourage those in Labour who do not want to compromise with the electorate.

The rising misery index

The misery index in the economy is likely to rise next year. Unemployment is almost certain to go up, although there is some dispute about how much it will increase by. However, it is unlikely that all the lost public sector jobs can be replaced in the private sector. Indeed, private sector bosses may be unwilling to hire displaced public sector workers whom they suspect of having led a cushy life. Women will be particularly affected as they are disproportionately employed in the public sector.

Inflation shows no signs of easing. There is pressure on commodity prices, particularly food, gas, oil and cotton. At some point the Bank of England will start to increase interest rates, although by how much and when remains a matter of argument. The CBI says 2.5% by year end: I think 1.75% is more likely.

Even so, one of the things that has helped many people through the recession is that mortgage interest repayments have, depending on the deal a person has, have been kept low. If they rose, real disposable income would be reduced even further. As it is, it will be hit by fact that wages are not generally keeping pace with inflation, by the rise in VAT and by the 1p per £ increase in national insurance contributions from April which is in effect a 1 per cent rise in income tax.

Not surprisingly, retailers are worried about consumer demand. Of course, an objective of current policy is to shift the economy from one driven by private consumption to one in which exports play a greater role.

Meanwhile, the Government is suffering a series of defeats at the hands of fiscal nimbyism. The unfortunate Michael Gove has had to retreat on school sports and free books for young children. In the latter case the sum involved is small, but one way in which retrenchment tends to happen is by cutting smaller programmes completely. Now the Government is under pressure on the forensic science service, the privatisation of which strikes me as not a good idea.

Campaigns may achieve victories on particular issues. An alliance of nimbys may well defeat the proposed HST from London to Birmingham, the start of a larger network. My local MP Chris White has come out against it, reflecting the views of his constituents. The opponents of the scheme say that the business and environmental case is flawed, but if that is so, how have countries such as China, France, Japan, Korea and Spain been able to make high speed trains viable whereas we just have a stretch of line in Kent?

What is clear is that there is choppy political water ahead in 2011 and it may not be possible to deflect the opprobium on to the Liberal Democrats.

The thinning blue line

There was quite an acrimonious exchange between police minister Nick Herbert and a Radio 5 Drive Time presenter yesterday. This was provoked by the announcement by the Chief Constable of Manchester police that nearly a quarter of his staff would have to be let go over the next four years.

Nick Hebert insisted that this would not make any difference to front line policing in Manchester, but it is difficult to see how he reached his conclusion, even if a greater percentage of staff was deployed on the streets.

Herbert's argument was the problem was that only 11 per cent of the police were out on the streets at any one time. This sounds quite shocking until one realises that most of them will not be on shift at any one time and others will be in the station interviewing suspects or supervising custody.

Herbert argued that there was too much red tape in the police and while this may be the case, a lot of it is generated by the need to present evidence in a form that will stand up in court. This is where backroom staff play an important role and if one cuts back their numbers some of the work will have to be done by frontline staff.

As a vox pop on BBC showed, voters in Manchester were not happy about these developments. I think that the policing issue is one where the Coalition Government could be in some trouble, particularly with traditional Conservative supporters.

Doubts about public expediture plans

The Institute of Government has pointed out that although by 2014-15 public spending as a share of national income would be back to the same level as it was in 2006-7, the composition of that spending would be very different. Expansions in the share of national income spent on pensioner benefits, the NHS and overseas aid would be funded through reduced spend on education, law and order and defence.

At Fathom Consulting's quarterly Monetary Policy Forum, the former Home Office permanent secretary Sir John Grieve said 'it seems most improbable' that the government would hold fast to its plans. Rachel Lomax, a former permanent secretary of three government departments, said the public might not accept large cuts in police and prisons that had not been flagged before the election.

The Public Accounts Committee has expressed doubts over the Government's ability to make genuine efficiency savings. Whitehall failed to make the mere 3 per cent savings set out in the 2007 comprehensive spending review. Two years into the three year programme to release £35bn in cash from efficiency, only £15bn of savings were reported. Of those, the National Audit Office, it judged only 38 per cent, or less than £6bn, to be value for money savings.

The committee is concerned that in order to reduce costs, departments will rely soley on cutting frontline services. The committee says it was concerned at the implications of evidence from the Treasury 'that it will simply reduce departments' budgets and then walk away from the responsibility for the delivery of the level of savings required across government.'

Of course, cutting back office services can have its impact. There are two EU committees working in a technical area which have been highly dependent on the UK and the Netherlands for their work, although with general political support from other North European countries. The UK may now not be able to afford to be involved. Up to now UK interests have been very well looked after because of its involvement.

Difficult politics

Responses to the defence review show how difficult the politics of cutting public expenditure is going to be for the Coalition Government. In my view with a cut in real terms of 8 per cent defence got off lightly. This was particularly true of the defence industries.

A spokesman for the UK Defence Association (an organisation I had never heard of before) was given a lot of air time on the BBC. Apparently a formal naval commander, he argued that as defence was the nation's first priority, it should not be cut at all. A prime example of fiscal nimbyism.

It is true that some parts of the defence budget have been cut more severely. In particular, the Navy has taken a 18 per cent hit. But this reflects what we need in a post-Cold War context when state versus state conflicts are rated as a relatively low threat.

There was also understandable concern from communities where bases look likely to be closed, particularly in Scotland. Local campaigns of this kind are, however, unlikely to affect the Government's stance.

Some Conservative backbenchers were also clearly unhappy at what they saw as too big a concession to the Liberal Democrats on Trident. Welcome to the give-and-take of coalition politics.

Today's cuts simply attempt to take back public expenditure back to where it was in 2006-7 in real terms. But even that is politically very difficult.

The conference season is under way

The pace of politics is quickening in the run up to the vitally important Comprehensive Spending Review. This week we have the TUC Congress and this will be followed by the Liberal Democrats, suddenly a more significant event on the political calendar.

On the radio this morning one public sector trade union leader said that not one public sector job should go. This shows a complete disconnect with reality. Even under a Labour Government there would have been public sector job cuts.

According to the June budget, we are already spending £44 billion on debt interest. This is more than we spend on defence (£40bn) or public order (£35bn). It represents a substantial opportunity cost. If the deficit was not cut, interest rates would go up, the UK's credit rating would decline and we would be spending even more on interest.

The BBC's Nick Robinson made a journey down the A1 last week in which he talked to members of the public about spending cuts. People found it far easier to say what they wouldn't cut than what they would. Overseas aid was mentioned, but this is a small proportion of the total budget.

Another popular candidate was 'welfare' and this is certainly a big ticket item. Child benefit may be stopped at 16 and the age at which people become eligible for the winter fuel allowance may be raised. In this way some dent may be made in the £194bn spent on 'social protection'.

Milk snatching

There is no evidence that free milk for under 5s makes any significant impact on their diet and nutrition and in any case it is a blanket subsidy that is not targeted on those in most need. Given the current fiscal climate, it would be a good way of saving £150m a year.

However, David Cameron quickly knocked down his health minister when she suggested getting rid of the free milk. No doubt he remembered the 'Thatcher the milk snatcher' that attached to Margaret Thatcher for so long. That was in part because it rhymed and someone actually made a song of it. I was reading a compilation of remniniscences the other day and it was pointed out that the milk was often in poor condition when it reached the children. Its original introduction in the 1930s reflected the power of the dairy lobby.

What this episode shows is the risk that relatively ineffective programmes will survive the cuts and more effective ones may take the hit.

Salami slicing

An increasing concern is being expressed, particularly on the right of the Conservative Party, that the Comprehensive Spending Review is taken the form of salami slicing. Quite big slices, yes, but rather than starting from a zero base and asking whether government needs to be undertaking a particular activity, good programmes are being cut as much as bad ones.

In this context the presentation by Andrew Gamble on the 2010 spending review at a British Academy forum last week was of particular interest. Gamble looked at different conceptions of the state such as the mimimal state (Nozick), the frugal state (Bentham) and the active state (Keynes). He set out three models of government spending (each relating to a share of public expenditure in GDP):
1) 44 per cent, the social investment model
2) 38 per cent, the Anglo-Saxon model
3) 25 per cent model, the free market model with the 1920s and 1930s in Britain as the historical precedent.

He argued that after periodic forest fires public spending tends to grow back. The consensus in the discussion was that Britain was likely to revert to a 38 per cent model and indeed there were some indications that that was George Osborne's conscious intention.

Of course, it is possibly to become too preoccupied with the arithmetic (which in any case is substantially influenced by how fast GDP is growing) and the size of the state rather than its shape. What can the state do and how can it do it effectively?

Ring fencing the NHS

The British Medical Association, the doctors' trade union, has complained that 'haphazard' cuts are harming the National Health Service: Cuts This announcement comes on the eve of their conference, but also when Conservative backbenchers are starting to complain about 'ring fencing' the NHS in the Comprehensive Spending Review.

If one does that, and also tries to keep cuts in defence and education down to ten per cent, that means that some departments could have to cut expenditure by a third in real terms which is very dificult to achieve without, for example, drastically cutting environmental protection services.

Some cuts could hit the NHS directly, for example cutting back on social care for the elderly could make it more difficult to get them out of hospital, leading to bed blocking. Warwickshire County Council is already proposing increases of fees for some services delivered to the home of 1,000 per cent, admittedly from a very low and hopelessly uneconomic base level.

The NHS does face the problems of an ageing population, an expanding medical technology frontier that drives up costs and rising patient expectations. Howver, here are a few suggestions:

1. Mrs Thatcher famously said 'we have dealt with the opticians' (or words to that effect, I don't have the transcript in front of me). I went my first eye test last week and it was free. Should that be the case for someone who is not poor? I was also interested to read on the back of the form that I was given that I could get a voucher towards my spectacles if I was a prisoner on leave.

2. Should prescriptions for free for everyone who is elderly? Or should the better off be at least asked to pay for a season ticket of £100 or so a year?

3. Anyone who was talked to GPs infornally will know that patients make considerable differential use of the service regardless of their state of health. Should charging be introduced, again with exemptions? Of course, that would really hit at the idea of a NHS free at the point of use and need and would probably be too politically controversial.

The Conservative pledge on the NHS was politically expedient. But does it make for good policy? Vince Cable didn't think it made economic and political sense and the former Labour health minister doesn't think it makes sense now.

Preparing for the budget

The sentence being used in briefings for the Sunday press on the Budget was 'A budget that is popular the day after is not a good budget'. The public has been prepared for medicine which will be nasty, but may turn out to be a little bit less unpleasant than expected.

Any VAT increase cannot be implemented immediately for practical reasons. Indeed it is difficult to see how it could be introduced until the autumn and it would not be too popular just before Christmas. So I would not expect it to be intoduced until after the January sales and possibly not until April.

One off the wall prediction which will probably be wrong: an increase in the current VAT rate of 5 per cent on domestic fuel. It is below the EU average of 8 per cent and could be sold as a carbon reduction measure.

The fiscal Nimbyists were out in force today. People in Sheffield were upset because of the withdrawal of the loan to Sheffield Forgemasters, but if it is such a viable project, why can't it be funded commercially? On Midlands television, people from Bromsgrove were complaining because they won't get an admittedly needed new station.

Although talk of a double dip reception is overdone, the Government does need to be careful about how it cuts capital projects. These are usually cut severely in times of public expenditure restraint, because it is a way of achieving quick results in cutting spending.

However, the downside is that necessary infrastructure improvements which can contribute to economic growth do not occur. The construction industry is a labour intensive one and has already been hit hard by the downturn in house building which may be intensified by the Government's promised 'Nimby's charter' to block development.

It is clear that the Government is prepared to 'think the unthinkable' about benefits and Frank Field has been brought back to finish the job that he should have been allowed to undertake by New Labour. 'Two brains' Willetts made it clear yesterday that while some universal benefits would always be part of the welfare state, there was a need to re-consider the balance between them and selective benefis.

With increasing life expectancy, generous public sector pensions are no longer affordable and John Hutton has been brought in to tackle this thorny problem. He was immediately denounced by the soon to be ennobled Prezza as a 'collaborator': at least he didn't use the phrase 'class traitor'. As someone remarked it's the revenge of the Blairites.

Cuts message has not got through

It seems that many members of the public think that public expenditure cuts will only hit a few background bureaucrats and will have no effect on them, even though the Institute for Fiscal Studies has said that the budgets of some 'unprotected' departments may need to be cut by as much as a third.

Despite warnings by the prime minister that 'every single person' will be affected, more than two out of five respondents to a ComRes survey think that spending cuts will affect them only a little, if at all. Fewer than one in four people, 23 per cent, expected to be affected a lot by the cuts.

One of the worrying aspects of the current situation is that the output gap - which is effectively a measure of the amount of spare capacity in the economy - is smaller than expected. Whilst there is spare capacity in labour, as indicated by the increasing number of people in part-time work, it may not have the necessary skills. There is a concern that some physical capacity has been destroyed for ever by the recesion. This would help to explain why inflation has been so high which may mean that the Bank of England will have to raise interest rates before too long.

The Social Market Foundation has argued that 'universal benefits' would have to go, including paying child benefit and winter fuel payments to the better off. It was always assumed that the social contract that supported the welfare state required that the better off get some benefits from it, but it may be that such universalism is no longer feasible or even required.

Growth outlook is gloomy

The Office of Budget Responsibility is expected to publish growth forecasts today that will show those that Labour was working on were hopelessly optimistic. No suprise there.

Many independent analysts have been calling for some time for a body like the OBR. Of course, how independent it really is will be the subject of debate. But, unlike politicians, it does not have an incentive to make out that things are better than they really are.

The boom revenues from taxation are unlikely to return. Public sector net debt is forecast to rise from 36 per cent of national income in 2007-8 to 75 per cent in 2004-15. This alone would raise interest payments to close to 2 per cent of national income.

Moreover, these figures do not take into account the effect of an ageing population on public sector pensions, state pensions and the NHS. Nor do they take into account payments on PFI projects which often have a duration of thirty years.

Retirement ages and life expectancy have got completely out of kilter. However, these are evidently not going to be tackled soon and the Government has no evident appetite to means test free bus passes or winter fuel payments.

We are in for a period of slow growth, rising unemployment and reductions in public services. Whether the public are really ready for this is questionable.

Fiscal Nimbyism

It's becoming evident that the public response to the proposed cuts in public expenditure is what is called 'Fiscal Nimbyism': I'm in favour of cuts, provided they don't affect me. It is also reminiscent of an old joke about the British: they want Swedish public services and American taxes.

Whilst one can understand the electoral pressures that lead the National Health Service to be treated as a sacred cow, it is questionable whether it is sensible to fence off a fifth of the budget in this way. Of course, there will be cuts in the NHS: the so-called 'efficiency savings' will see to that.

But isn't it time to have a more fundamental debate about how we deliver health care that gets beyond complaining about the number of administrators?

PM lays it on the line

An interview in the Sunday Times with the prime minister was undoubtedly part of the 'softening up' process for the substantial public expenditure cuts and significant tax rises to be expected in the budget.

New Labour's way out of the structural budget deficit always relied on what David Cameron called 'trampoline' growth rates which I have always doubted were attainable in the medium term and look less likely now. They also assumed that interest rates would not go up very quickly, but once they do, the cost of servicing the debt - which brings no benefits to users of public services - will also increase.

On the tax side, the prime minister refused to rule out an increase in VAT. Of course, considerable revenue could be raised by broadening its base, but some of the revenue obtained would not be worth the political trouble. VAT on books, even at a lower rate, would be portrayed as a 'tax on knowledge'. VAT on newspapers would upset the press barons. VAT on construction would upset an already battered industry. But that doesn't mean that nothing can be done.

On the expenditure side, the Conservatives intend to tackle the very large amounts paid out in disability and incapacity benefits. New Labour did start to try to tackle this, but it is a political minefield. Lower back pain can be very debilitating and mental health problems are always difficult to assess. Freezing benefits for a year would bring in over £4bn and would be quite politically popular. However, it is puzzling that the Government appears to rule out means testing the winter fuel allowance and similar benefits. Should it be available to higher rate taxpayers?

However, it does seem that quite a lot of the cuts will fall on public sector pay, public sector pensions and public sector jobs. This would bring quick returns and might be quite popular with those not working in the public sector, but would also involve the Government in confrontations with the most unionised sector of the economy.

Nick has given his own version of the story in The Observer where he emphasises the need to make cuts sensitively. It seems that Nick and David are getting on very well, texting and E-mailing each other. Nick has been round to David's for dinner (which he refused to do before the election), but Sam Cam wasn't there as she and the children have been taking a holiday in Ibizia as they face up to life 'above the shop'. Apparently, the prime minister's sleep has been disturbed by the chimes of Big Ben at night.

David Cameron has had to deal with the tragedy in Cumbria (which I thought he did in exemplary fashion) and the Sunday Times says he is already looking his age. The job certainly aged Tony Blair. It's a tough task at the best of times and times are not easy.

Axeman uses the A-word

Liberal Democrat Chief Secretary to the Treasury David Laws is a former banker and as dry as they come in economic terms. He is in effect the Govermment's axeman and he makes it clear in the Financial Times this morning that he won't be afraid to use his axe, using the austerity word that was taboo in the election. He also made it clear that he will be sensitive in seeking to protect vital services.

The problem is that the Coalition Government doesn't have a lot of room for manoeuvre. They have said that NHS spending will increase in real times: in practice this means cutbacks given an ageing population and advances in medical technology. They are seeking to protect spending on schools.

Various perks for pensioners such as the winter fuel allowance and free bus passes will be retained, even though the recipients are often still in work or well off. What's more pensions in future will go up in terms of either inflation or earnings, whichever is greater, or by 2.5 per cent as a minimum. Transfer payments like this cost huge amounts of money and increasing the retirement age to reflect the fact that people live longer has been postponed well into the future.

So other aspects of public services will have to take a big hit. There will have to be a bonfire of quangos and some of the monitoring ones set up by New Labour will be no great loss. Others deliver important regulatory or scientific services, e.g., FERA which I visited on Thursday.

Higher education is likely to take a big hit, but the Lib Dems are reluctant to allow universities to raise the fees they charge to home students.

Some people I encounter don't seem to be facing up to the new reality. They are burying their heads in the sand or recognising that they will have to be made pure, but not just yet. Well, cuts are going to start impacting services near you before long. That's when we can expect political trouble. The structural budget deficit has to be reduced but it's difficult given the number of sacred cows there are.

Don't cut too soon

Respected independent research institutes such as the National Institute for Economic and Social Studies and the Institute for Fiscal Policy are now calling for public expenditure cuts to be deferred: Cuts For the IFS Green Budget go here: IFS

This is posing a bit of a dilemma for Dave Cameron. Feedback from the doorsteps was already suggesting that the austerity message was not going down too well. However, restraining cuts has not gone down too well with party activists, many of whom are well to the right of Dave. He also has to soften his tone without seeming to wobble.

One suspects that once again the electorate wants to have its cake and eat it. They accept the idea of cuts in hypothetical terms, but resist most specific cuts. For example, there has been a big row in Warwickshire about effectively ending the county's musical education service. It will save less than one million pounds, illustrating the rule that small programmes tend to cut first and harder. Personally, I think that music has a great deal to offer as part of an educational programme, but it does show how difficult it is in practice to cut anything.

Philip Stephens had an excellent essay on this in the Pink 'Un the other day which is well worth reading: Stephens

'U-turn' by Dave?

The language of British politics has not been enhanced by the notion of the U-turn. It was originally introduced to describe Ted Heath's dramatic policy shift in 1972 and Mrs Thatcher subsequently declared: 'U-turn if you have to. The lady's not for turning.' In fact it is quite sensible for politicians to adjust policies to changing circumstances. If the facts change, then one can change one's mind, as Keynes in effect said.

Now Dave Cameron has in effect been accused of a U-turn over an apparent retreat from a pledge to make early cuts in spending: Spending

This will be a very difficult decision for whichever party is in government after May. There is no doubt that the economic recovery is anaemic (particularly compared with the latest figures from the US) even if the GDP figures for the final quarter of last year are subsequently increased. My own intuitions rely to some extent on what I hear from the chamber of commerce network in Oxfordshire and the word there is that the weather in January hit demand quite hard. They are also noting a lack of one person start ups of new business which normally occur in that area. There is a real risk of a 'W' shaped recession if public expenditure is cut too quickly.

On the other hand, if sufficient cuts are not made (as distinct from projected) the UK's bond rating will be downgraded and we will end up paying a lot more in interest on our gilt edged, if we can sell it. The pressure is on Greece now, but it may switch elsewhere.

It may be that Dave's softening of his tone was a response to the latest poll figures which suggest that the Conservative lead has been cut. There are also unsubstantiated reports of a rift between Dave and Boy George: Poll

A 9 per cent lead would result in a hung Parliament with the Conservatives as the largest party (no doubt backed by the Ulster Unionists following their recent discussions). However, one has to be careful about reading off from a national poll to individual seats.

The Conservatives have been making a big effort in key marginals. A simple reading of this poll would cast doubt on the chances of Chris White winning Warwick and Leamington for the Conservatives. My sense, however, is that the Conservatives are still doing well in the constituency.

The political science literature tells us that campaigning makes a difference. Chris White fought the constituency last time and he is a local councillor. He has been assiduously courting key groups who might not necessarily be natural Conservatives. Last week he met nurses at Warwick Hospital and the meeting seems to have gone well.

There is a long way to go yet and I do think that some voters harbour negative memories of the last Conservative administration and fear a 'slash and burn' approach to public expenditure. It's a difficult path for Dave Cameron to tread.

Facing up to hard choices

Talking the talk is one thing but walking the walk is another. For all the talk of facing up to hard choices, politicians are shirking chances to reduce public expenditure. Pensions and other benefits are going up by 2.5 per cent next spring. The Financial Times estimates this will make state pensioners 4 per cent better off given that there is a negative RPI.

The 'inflation rate or 2.5 per cent whichever is higher' rule was introduced in 2000 when there was a political storm when New Labour increased pensions by only 75p. The public finances were in a healthier state then, whilst holding back the increase now would save a substantial £5bn. But no party wants to be seen squeezing pensioners, a sizeable slice of the electorate with a high propensity to vote, in the run up to a general election.

Now the influential NIESR has pitched in with an argument that the retirement age should be raised to 70 by 2015: Retirement . The NIESR said that the structural budget deficit was running at an unsustainable level of 6 per cent of GDP.

The alternative to a pension age rise was freezing public sector pay for five years whilst losing 120,000 jobs a year for the same period; a 7p increase in basic tax rates; and an expansion in the VAT base to include everything but food and children's clothing.

The Office for National Statistics has reported that government borrowing rose to £77.3bn in the first six months of the financial year - more than double the debt racked up in the same period last year - as tax revenues tumbled by 10 per cent.

Such a sharp and sudden increase in the pension age would not be politically feasible. But then some hard choices are going to have to be made. At some point the phoney war on public expenditure will come to an end.