Osborne: the axe falls

May 16, 2011, 1:11 AM UTC

Wednesday, October 20th, has long been billed as the most important date in the political calendar since the election. But it may turn out to be the most significant date in the whole life of the Coalition Government. The announcement by George Osborne, the Chancellor of the Exchequer, of the most radical cuts in public spending for eighty years is likely to determine the fate of the economy, of the Government itself and will affect the lives of virtually everyone. But were his decisions right for the economy? And were they fair?

The aim of the package was clear enough. It was to cut Britain’s record peacetime government deficit. That deficit is largely the result of the deep recession we have just been through and which saw the country’s output fall by 6%. But it is the Government’s case that even before the recession hit us, the previous government had racked up far too big a ‘structural’ deficit – one which does not disappear when economic growth revives – and it is this they wish to eliminate over the next four years.

Everyone agrees that the deficit cannot be left as it is. The danger with such a huge borrowing requirement is that lenders start to worry whether governments will be able to pay the money back and so insist on higher interest rates on the money they lend. Higher interest rates then stifle growth. This is what has happened to Greece and Ireland and the Chancellor’s main aim has been to avoid the same happening here. That is what he meant when he told MPs: ‘Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt. It is a hard road but it leads to a better future.’

His critics, however, say that to talk of being on the brink of bankruptcy is absurd and challenge him, not so much for wanting to cut the deficit, but for cutting so deeply and doing it so quickly. The charge against his economics is that he is being too ambitious and risks being self-defeating.

The Chancellor’s plan involves cutting £81bn out of public spending over the next four years. Around 490,000 public sector jobs are expected to go. His critics argue that this will have a devastating effect in cutting demand in the economy just when the recovery is faltering anyway. The critics’ case is that even though there may (or may not) be a case for reducing public spending in the long term, this is absolutely not the time to be doing it.

Their case is that it might be a gamble worth taking if the rest of the world were booming. Then we might expect that jobs lost in the public sector would be offset by more jobs in our export industries as we sold more of our goods to a world still keen to spend. But that’s not the situation we find ourselves in. Everyone else is hunkering down too so it’s far from clear who could pick up the slack created by the spending cuts. The effect of them, therefore, can only be to check growth, raise unemployment, increase public spending in order to pay for the unemployed and so increase the deficit itself. That’s why they claim it is self-defeating.

Mr Osborne has no truck with this argument. He is confident that the private sector will be able to pick up the slack and create more jobs. And he says that any problems with demand faltering can be met by the Bank of England’s control of monetary policy. Although interest rates are already virtually zero the Bank still has the power to increase ‘quantitative easing’, essentially printing more money. And if the worst came to the worst and economic growth did start to falter then, he argues, that is just the time when financial markets need to be reassured that at least the Government’s finances are in order. So, as he insisted on the Today programme this morning, there is no Plan B.

To no one’s surprise, economists are divided about who is right. In short, no one knows. But for that reason, the Chancellor’s strategy is, at the very least, a gamble.

The Government wants its planned spending cuts to be judged not only by whether or not they are economically sane but also by whether they are fair. The Chancellor insists they are and that ‘the broadest shoulders’ will bear the greatest burden. Once again, though, his critics say the opposite. Their case is based largely on the Government’s important strategic decision to concentrate cuts especially on the welfare budget.

When the new Government embarked on the spending review it made clear that it wanted to protect funding on the NHS, schools and international development. As a consequence, other departments were asked to look for cuts of 25% or even 40% in their budgets. In the end the average departmental cut was 19%, with large variations between the departments. The Chancellor was able to limit the cut in services to this figure only by taking a sharper axe to welfare spending. In addition to the £11bn cuts announced in the summer a further £7bn was announced on Wednesday.

These include, among other things, restricting eligibility to part of incapacity benefit to one year, removing the mobility component of disability living allowance to residents in care homes, and tightening up on the terms of working tax credits. Housing benefit is to be cut too, raising from 25 to 35 the age at which single people can receive benefit for a flat or house as distinct from a room in a shared property. It is because these and other benefits that have been cut are taken up mostly by the poor that the charge of unfairness has been levelled at the Chancellor.

Some argue that it would have been fairer if he had taken the axe to universal benefits. Only in the case of child benefit (which will no longer be paid to higher-rate taxpayers) have universal benefits been touched. In particular, universal benefits to the elderly, such as winter fuel payments and free TV licences, will go on being paid irrespective of the income of the recipients.

The Chancellor argues that fairness has to be judged in a broader context. No one, he points out, is going to be spared the pain of spending cuts that will put up bus and rail fares, see local services reduced, axe police numbers, and so on. From 2020 the pension age will rise to 66 for everyone. But, politically, it remains a major problem for the Government to persuade the public that its measures really are fair. That’s because, for all the insistence that the cuts were motivated by necessity rather than ideology, the case will be made by the government’s political opponents that it wanted to inflict this pain anyway. They will point to the Tory MPs who cheered the Chancellor at the end of his statement as evidence of this.

It is still early days. How the huge cuts in local Government funding, higher education and so on will actually pan out remains to be seen. There are likely to be more cases of apparent absurdity, such as aircraft carriers without aircraft, in the months and years ahead. That’s why last Wednesday is likely to be the most significant day in the lifetime of this Government.

    What’s your view?

  • Do you accept the Government’s assurance that the axe was wielded out of necessity rather than desire?
  • What do you make of the economic arguments about the cuts: is the Chancellor right to cut so deep and so fast or do you think he risks stifling the recovery?
  • Do you think he needs a Plan B and, if so, what should it be? How will the cuts affect you?
  • Do you think Mr Osborne is justified in claiming that his plans impose the biggest burden on the broadest shoulders, or do you think they unfairly target the poor?
  • Was he right to cut welfare spending more in order to cut services less?
  • Should he have axed universal benefits more?
  • And which part of the cuts package do you think will cause most problems in the future?