Spending review: Osborne gambles with the economy

Larry Elliott, Thursday 21 October 2010 


More money for schools. Extra dosh for a bridge across the Mersey. A Britain counting the pennies but capable of keeping bobbies on the beat, the army in Afghanistan and the nation’s borders secure from international terrorism.


Listening to George Osborne, there were times when you had to pinch yourself to remember that this was supposed to be the moment of truth, the day when the spending stopped and the debt work-out began. Where was the evidence of the axe that the chancellor had been promising to wield with such relish?


The answer is that Osborne has learnt lessons from the godfather of Treasury spin. No, not Gordon Brown, although there were times when today’s sleights of hand and burying of bad news had strong echoes of the clunking fist at its worst. The real inspiration for the speech was Jean-Baptiste Colbert, treasury minister to Louis XIV, who once said the art of taxation was to “pluck the maximum amount of feathers from the goose with the least amount of hissing”.


Osborne did not quite say that the state had become one of those geese destined to become foie gras, force fed until they can barely move, but that was the gist. The country was facing the bills from a “decade of debt” and since like any solvent household the government would only buy what it could afford, there would now need to be four years of plucking.


Yet, with the economy clearly slowing down and at risk of a second downturn, this was not the moment to issue more blood-curdling warnings about the miseries of austerity. Consumers and businesses have already got the message; the government believes that the country is flat broke and has to reduce borrowing drastically over the next four years. Indeed, the low levels of confidence across the economy suggests that the message has been driven home somewhat too effectively.


So Osborne set out to minimise the hissing, both by stressing that the “hard road” led to a better future but also by asserting that there were easy, painless savings to be made across the public sector. He did this in a number of ways. The chancellor was less draconian on child benefit, science and infrastructure spending than feared. He promised, without quite specifying how, that the banks would have to do their bit to fill the black hole in the public finances. He said that the Queen had agreed to a one-year freeze on the civil list.


More significantly, the Treasury has spared departmental budgets by saving an extra £7bn on welfare. The chancellor gabbled his way through some important changes to benefits in the middle of his speech, presumably hoping to give the overall impression that the package was not as bad as it might have been. Nobody who is poor, especially if they are claiming housing benefit, is likely to share that conclusion.


Finally, the chancellor announced the expected “bonfire of the quangos” as part of a war on waste. He announced that £20bn of efficiency savings could be made in the NHS; “cutting costs and scrapping bureaucracy” would allow the police to spend more catching criminals if not, given the reduction in prison places, banging so many of them up; a 15% cut in resources for HM Revenue and Customs could be achieved through better use of IT and greater efficiency, and have no impact on the state’s ability to crack down on tax cheats.


This is all familiar stuff. Every chancellor in every government in living memory has declared war on bureaucracy, pledging to recycle the savings from “cutting red tape” into “frontline” services. Few of them have succeeded, and Osborne’s message that he can produce huge efficiency gains from the public sector without really affecting the level or the quality of service provision represents the first big gamble of today’s announcement.


The second gamble is that he can bring down the deficit without killing off growth. On the government’s own figures, there will be 490,000 jobs lost in the public sector over the next four years as a result of the CSR; at least an equivalent number will be lost from private sector firms – in the construction sector, for example – that rely heavily on state contracts. Osborne is banking on the rest of the private sector growing quickly enough to absorb all the jobs lost from the public sector and creating at least a million more on top of that.


While not unprecedented, this will be challenging. The last time the UK went through an austerity programme — the mid-1990s — large numbers of private sector jobs were created. But this was a period when the global economy was booming, making life easier for exporters. It was a time when the economy was benefiting from the sharp drop in interest rates and the 25% devaluation of sterling that resulted from Britain’s departure from the exchange rate mechanism on Black Wednesday. And it was a time when the banking system was functioning normally. None of those conditions apply today, which is why reducing demand by 0.5% of GDP in each of the next four years will hit growth and make it harder to bring borrowing down.


The chancellor made it clear yesterday that he would “stick to the course”, with no changes to his fiscal plans whatever the state of the economy. This is dogmatic, foolish and – in the third big gamble – puts enormous pressure on the Bank of England to provide the necessary monetary stimulus should growth suffer as the spending restraint bites.


Yet minutes of the latest meeting of the Bank’s monetary policy committee show that Threadneedle Street is split on what to do next. One of the nine members wants a growth boost now. One wants interest rates to go up. The other seven want to suck it and see. It is unlikely that the Bank will do enough, quickly enough to prevent the economy tanking next year. If that happens, Osborne will get the blame as the hissing becomes deafening.


Source: The Guardian



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