Britain's government will look for savings in all areas of spending, finance minister Alistair Darling said on Wednesday, as the ruling Labour party seeks to convince voters and markets it can fix public finances.
Darling forecast this year's government borrowing to hit a record 175 billion pounds in his annual budget last week, as the recession cuts tax income and swells welfare spending, on top of significant state support to banks.
Ahead of an election probably due in June 2010, out-of-favour Labour and the resurgent opposition Conservatives are likely to fight the campaign around who is most trusted to balance the books and restore sustainable growth to the economy. The government estimates its budget will not come back into balance until 2017/18, with debt in the meantime rising to around 22,000 pounds per head.
"I don't think there's a single item of government expenditure that you can't say: let's have a look at it, do we need to spend this money, can we spend it better and more efficiently?" Darling said at a business conference in London. "That is something we are going to have to do." Darling has announced measures to cut the rate of growth in public spending in the coming years and raised the top rate of income tax for high earners.
Analysts say much more stringent fiscal tightening will be needed, especially if Darling's forecasts for a strong economic rebound - after an expected 3.5 percent drop in gross domestic product this year - fails to materialise. The Conservatives argue that spending must be cut more drastically, proposing a "government of thrift in this age of austerity". However, the public sector accounts for about one fifth of Britain's economy and trimming it back too far could put a drag on any recovery.
The Conservatives have identified public sector pay as one area where savings could be made. Labour has linked public sector pay deals to the official two percent inflation target, but figures on Wednesday showed weekly earnings in the sector rose 3.2 percent on a year ago in February. That compared with a 7.7 percent drop in the private sector. Overall weekly earnings fell at their sharpest annual rate since the series began in 2001.
The Conservatives have said they would require public sector pay deals to reflect economic conditions - a signal they would be much tougher than the current policy. They also want to see controversial schemes such as identity cards scrapped. "ID cards are an interesting point because the lion's share of the expenditure is going on biometric passports," Darling said. "People are rightly concerned about who goes in and who comes out of this country."
Business groups are also calling for public spending cuts before tax rises as the way to reduce government borrowing.