No one disputes it was bold. No one disputes the effects will be savage. The question left hanging after George Osborne’s Budget is whether the gamble the coalition government has taken will pay off both for the economy and for the government itself or whether it will bring disaster to both. As the Financial Times headline put it: ‘Osborne’s kill or cure Budget’.
The Chancellor’s logic is clear enough. In his view the biggest threat facing the British economy is the size of the government’s own financial deficit which, at over 10% of national income this year, is one of the biggest in the developed world. Only part of this can be attributed to the recession that followed the banking crisis and which inevitably caused government receipts to fall and its expenditures to rise. It’s the underlying ‘structural’ deficit which won’t automatically disappear when growth returns and which Mr Osborne blames on the last Labour government’s profligacy, which he has in his sights.
Eliminating it is what made his Budget, he claimed, “unavoidable”. The spectre of Greece and other countries unable to persuade the rest of the world to lend them money haunted this Budget. And even if there is no imminent threat of the British government being unable to sell its debt, the Chancellor takes the view that spending vast amounts of taxpayers’ money in interest payments to those who have lent it so much money is foolish: that money could better be spent on actual public services.
Few people deny that the government’s deficit needs cutting over the next five years or so. Indeed the Labour government itself had its own plans to axe public spending, although before the election it shared with all the other parties a reluctance to spell out exactly where the axe would fall. Labour planned to cut the deficit by £73bn by 2014/15.
What Mr Osborne has done is add another £40bn to this figure, leaving him with £113bn to find from tax increases and spending cuts. If it actually happens, the deficit will be down to a highly respectable 2% of national income four years hence. The proportion of national income spent by the government will have fallen from 48% to 40%, the level at which governments of both parties have tried to keep it in recent decades.
How does he propose to do it? Headlines inevitably concentrated on the tax increases. VAT will go up to 20% next January. A levy on banks’ balance sheets will raise £2bn. Capital Gains Tax will go up to 28% for higher earners.
But at the same time he has tried to soften the blow, especially on the poor. The threshold below which people won’t pay any income tax is to be raised by £1,000, taking 880,000 lower earners out of tax altogether. An extra £2bn is to be spent on child tax credits. The basic state pension will rise in line with earnings, not just prices, from 2011. Perhaps with an eye to his Liberal Democrat coalition partners, Mr Osborne said: “Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive Budget.”
Many would dispute that, in part because VAT increases tend to hit the poor harder. But the main reason they would cite is that the tax measures in the Budget paint far less than half the story. The main attack on the deficit comes not via tax increases but via spending cuts and it is how these will affect poorer people that will determine whether the Budget can claim to be progressive, they say.
Details of where the spending cuts will come remain mostly for the future. The Chancellor did announce some measures, however. Public sector pay for those earning more than £21,000 a year will be frozen for two years. Welfare benefits will increase more slowly. But the bulk of the detail will come with the spending review in the autumn. With health and overseas aid protected, Mr Osborne made plain that other departments will have to cut their budgets by 25% on average over the next four years.
That is a colossal figure and unparalleled in any previous round of spending cuts. How can it be done? In subsequent interviews Mr Osborne said there would have to be a mix of trimming of costs for programmes that would nonetheless continue and wholesale axing of projects and functions currently carried out by government. But he also suggested that if we wanted to protect some of the things government does then much bigger cuts would have to be made in welfare budgets which, he argued, had risen too fast under the last government. He invited the public to make their own suggestions.
It is here that scale of the gamble the Chancellor has taken begins to become clear. Some commentators, including former politicians who have tried their hand at cutting spending (such as Michael Portillo), simply question whether cuts on this scale are achievable. In their view, cutting deficits requires more of the pain to come from tax increases and less from spending cuts, simply because the latter are so hard to pull off. If Mr Osborne had to admit failure in his quest for cuts and put up taxes more instead, it would constitute a significant political defeat.
But there is a much bigger gamble he is taking, according to some experts. It’s that the Budget measures may take so much demand out of the economy that it will slip back into recession, so making the deficit problem worse not better. The Chancellor’s newly-appointed and independent Office for Budget Responsibility concedes the point in theory but argues that the figures should not trouble us. Economic growth this year will be only 0.4% less than it would otherwise be, it claims, and it forecasts growth of 2.3% next year and 2.8% in 2012.
Others, however, are not so sanguine. Consumers are still saving their way out of their own past excesses of debt and will be hit by the coming tax rises. The world economy shows no signs of the growth necessary to help us sell exports, especially in our main market, the eurozone, which has its own deep problems. And investors will be wary of increasing their own spending, despite the help given them by the Chancellor who announced that corporation tax would be reduced by 1% a year for the next four years.
The sceptical view of the Budget’s effect on growth was expressed by David Blanchflower, a former member of the Bank of England’s monetary policy committee and the first to forecast the recession that followed the banking crisis. He said: “You can’t just decimate the public sector and assume the private sector will step into the hole.”
If Mr Osborne’s gamble pays off the economy will end up in a more healthy and stable condition and the coalition government will be able to go into the next election with real success under its belt. But if it doesn’t, the economy will be back in the dumps and the coalition may well, by then, have collapsed. We shall see.
What’s your view? Do you think the Chancellor was right or wrong to make cutting the deficit the prime aim of his Budget? Was he right or not to attempt to cut the deficit by a further £40bn beyond what Labour was planning? Do you support or not the tax increases such as the rise in VAT to 20%? Do you think his measures to help poorer people justify his claim that the Budget was ‘progressive’? Do you think cuts of 25% in most government departmental budgets is achievable or not? Should welfare payments be cut more instead? What suggestions would you make for cuts? Do you think taking so much money out of the economy risks plunging it back into recession or do you think it will ‘cure’ rather than ‘kill’ the economy? And do you think the coalition will survive the difficult decisions ahead?