Austerity: you ain’t seen 'nuthin' yet…

February 08, 2013, 11:06 AM GMT+0

John Humphrys asks your views on austerity, the government's approach to tackling the deficit, tax and welfare budget

“We shouldn’t lose our sense of shock and awe with some of these numbers, they are all of them pretty much historically unprecedented and particularly some of these spending cuts look very, very hard to deliver.”

Those were the words of Paul Johnson, the director of the Institute for Fiscal Studies, when he delivered his think-tank’s most recent ‘Green Budget’ earlier this week. He was speaking about what lies in store for us all after the next election no matter which party gets elected. He was bracing us for the very tough times that are still to come. And, given the respect in which the IFS is held by most experts, we should probably take heed.

Many people blithely imagine that the worst of austerity is nearly over. After all, they think, we’ve had nearly three years of the hair shirt since the coalition government came to power with the overriding priority of cutting the deficit in government finance. Back then it was expected to take five years to achieve the goal. But things have not gone to plan.

The main problem is that the economy has not recovered as the government (and many others) expected. Some, including the Labour opposition, argue that this was inevitable because the government’s own deficit-cutting policy would hamper economic growth. The government (and others) argue that other factors, such as the crisis in the Eurozone, have been much more to blame. What is not in doubt is that it is the failure of the economy to grow as hoped that has meant the period of austerity is going to go on for even longer.

Last year the chancellor, George Osborne, announced that it would now extend to eight years. As he argued at the time, he could have cut government spending even more but he was reluctant to do so because of the effect on tax revenues. In effect he has responded like a Keynesian, allowing the spending to continue in the hope that it ultimately boosts growth. But in the short term at least, government borrowing is not coming down as planned.

In fact in the tax year 2014/15, the government is planning to borrow £64bn more than it planned only two years ago. It’s this increased borrowing that is responsible for the austerity programme having to be extended well beyond the next election and explains Mr Johnson’s apocalyptic warning.

So far the government has approached the business of cutting the deficit by taking most of the strain in cuts to government spending rather than by putting up taxes. Three quarters of the effort has been focussed on spending cuts and only one quarter on tax rises. But only some departments are facing cut. Health, education and overseas aid budgets have all been protected, which obviously means that other departments have been much more savagely hit. In future, the government also wants to protect the capital spending budget of the defence department (though not its current spending). So other departments are in for an even more torrid time.

The IFS reckons that if the same pattern of spending cuts and tax rises is followed after the next election then the budgets of those non-protected government departments will be a third smaller in 2017/18 than they were in 2010/11 and job losses in the public sector will have risen to 1.2 million. Mr Johnson said of such cuts: “If they are delivered, not only will they result in extraordinary levels of cuts across public services, they’ll also change very dramatically the shape of the state that is delivering them.”

But will they be delivered? And should they be? There are of course alternatives. More of the strain, for example, could be taken by tax rises. The IFS points out that taxes will have to rise anyway and notes that historically governments always raise them in the year after an election (I wonder why they wait!) between £10bn and £20bn extra revenue will be needed after 2015. But how?

The most obvious option is to put up income tax. This would mean between 2.5% and 3% on the basic rate of income tax. But although the basic rate has been held pretty constant for the last fifteen years, taxes on work have increased as national insurance contributions (which most of us regard as little different from income tax) have been raised. One of the problems with raising the basic income tax rate is that it falls heavily on young workers most of whom are already carrying a heavy burden (high rents, student debts to pay off) compared with older generations. The top rate of tax could be raised but experience has shown that beyond a certain point that generates little revenue because the very rich find ways of getting round it.

Another tax option is to raise VAT or to extend it to currently exempt categories of expenditure such as children’s clothes and food. This would be fairer, it’s argued, because it would spread the burden to older people, many of whom are doing quite nicely at the moment. The fear here, though, is that higher VAT would choke off demand in the economy, vital for getting it to grow.

So inevitably the focus goes back to spending. The biggest budget is the welfare budget. This has not been protected but some are arguing that it needs to be hit even harder. For example, many in-work benefits are set to rise by only 1% (and therefore less than inflation) in the next three years but a case is being made that they then should be frozen altogether. Also proposed is the means-testing of benefits paid to the disabled and carers and most of all the ending of universal benefits such as free bus passes, television licences and winter fuel payments to the elderly. Only poor pensioners should receive them, it’s argued.

But perhaps the biggest question is whether the protected budgets of health, education and overseas aid should go one being a special case or whether they too should face the axe after the next election.

Such are the questions not only the government but the opposition parties will have to address between now and polling day. Perhaps when they come up with their answers we shan’t want to vote for any of them.

What’s your view?

  • Are you surprised to be told that austerity is not only going to have to continue after the next election but is likely to be more acute?
  • Do you think that the fact that it will, is an indictment of the government’s approach to tackling the deficit or do you think that the slowness of the economic recovery (which has caused the problem) was largely beyond the government’s control?
  • Do you think it’s right to try to tackle the deficit by taking three quarters of the strain in spending cuts and only one quarter in tax rises?
  • If you don’t think it is, what proportions do you advocate?
  • If taxes need to rise, which ones should be put up?
  • Should the welfare budget be cut further and, if so, how?
  • And do you think the health, education and overseas aid budgets should lose their protection from the axe?

Let us know what you think.