By Daniel Hunter

David Cameron must give George Osborne the freedom to deal with the most important budgets in his fourth Budget next week, according to new research from the independent think tank Reform.

While the Chancellor has correctly set out to eliminate the structural deficit and put public debt on a downward track, he has had to operate with one hand tied behind his back. The Prime Minister cannot continue to rule out reducing spending on the NHS, pensioner benefits and schools.

The NHS, pensioner benefits and schools (along with the smaller budgets of international aid and defence equipment) have been “ring-fenced” from cuts. Yet these are some of the biggest budgets. Health, pensions and schools alone accounted for 2 out of every 5 pounds the Government spent in 2012-13. These budgets will in fact account for 60 per cent of the total increase in spending between 2011-12 and 2014-15.

By ring-fencing budgets, the Government has created a perception of underfunding while leaving the real drivers of spending unaddressed. Cuts have fallen on departments on political grounds, rather than to improve value for money. This is like putting the public finances on a crash diet that actually reduces the chances of long term weight loss.

There are growing calls for the Chancellor to inject a stimulus in the economy, whether tax cuts or spending rises or both. Higher growth is vital, but an increase in the growth rate would do little to solve the Chancellor’s money problems. If the Chancellor could wave a magic wand to put the economy at 100 per cent health, government spending would be only £23 billion lower in 2012-13, out of a total of £674 billion. Tax revenues would only rise by 1 per cent and two-thirds of the deficit would still remain.

Key figures in the report are:

· In 2012-13, spending in the projected areas of health, pensions and schools is expected to account for 40 per cent of all spending.

· Annual spending on health, pensions and schools is expected to increase by around £22.7 billion between 2011-12 and 2014-15. This is close to 60 per cent of the total increase in spending in this period.

· Spending on health alone will account for 22.5 per cent of the total increase in spending between 2011-12 and 2014-15.

· 55 per cent of all welfare spending goes to pensioners, and so will not reduce when economic conditions improve.

· The UK government was running deficits even before the Global Financial Crisis hit. In the years from 2001-02 to 2007-08 general government gross debt increased from 37.0 per cent to 43.6 per cent of GDP. This was while the economy was growing strongly and debt should have been falling.

“The UK’s problems with overspending will not be addressed without a new approach. The problems facing the public finances are structural and they require structural solutions. Crash diets do not work," James Zuccollo, Senior Economist at Reform, said.

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