Does the Coalition have the courage to carry out these cuts?
First published in the Telegraph on 24 June 2010
Since Angel Gurria is Mexican, I presume he is not a connoisseur of Yes, Minister. So when the head of the Organisation for Economic Co-operation and Development described George Osborne’s first Budget this week as “courageous”, I doubt he meant it in the Sir Humphrey sense: that a given policy might end in political disaster and the minister’s scalp.
Still, this was – in both senses of the word – one of the most “courageous” Budgets in living memory; even more so than Geoffrey Howe’s 1981 number, when he followed his and Margaret Thatcher’s instincts and infuriated the entire economic establishment with a programme of spending cuts and tax rises.
Although Mr Osborne characterised his deep cuts to the deficit, which amount to half a trillion pounds over the next five years, and the VAT rise, as “unavoidable”, they were not obligatory. Britain could have trundled on with a far larger fiscal black hole for years, at the cost of economic stagnation, falling incomes and, ultimately, a sovereign debt crisis.
Instead, the Chancellor has chosen to rage against the dying of the light. His plans are not merely brave, but inspiring; the maths is immaculate. By the end of this parliament, the yawning chasm in public finances will have been closed. The Government will still be borrowing; but with the national debt increasing more slowly than the economy is growing, David Cameron will be able to shrink the size of the state without inflicting further austerity.
But – and this remains the big question – can Cameron and the Coalition survive until they reach that promised land? The omens are discouraging. Consider the magnitude of the retrenchment set out in the Budget. The spending cuts are similar in size to those implemented in the 1920s, when Britain willingly dragged itself into deflation in order to rejoin the Gold Standard. No other peacetime cuts come anywhere close. And today’s challenge is even tougher than it was then, when half of the task merely involved sending women home who had been enlisted to work in factories and government departments.
The Institute for Fiscal Studies (IFS) pointed out yesterday that, even with the £11billion of welfare cuts the Chancellor is already planning, the burden on departmental spending will be severe. The Government’s pledge to ring-fence the NHS means that schools and defence, which will be partially protected, are likely to suffer a 10 per cent cut. Other budgets, such as those for the Home Office, the Justice Ministry, transport, housing and higher education – face a full third being lopped off. There are, of course, large amounts of waste in the public sector, but few would wish such a devastating hit on any organisation. Not only will public services suffer (schools will close; police numbers will fall), thousands – perhaps hundreds of thousands – of state workers will lose their jobs.
The gory detail will be revealed in October’s comprehensive spending review (CSR), and will surely prompt the biggest round of industrial action since the 1980s. In this light, Mr Osborne’s Budget begins to look rather more like one that Sir Humphrey might describe as courageous. It is starting to worry the markets. On Tuesday, as the Chancellor was speaking, the yield on benchmark government debt dropped sharply for a moment, as investors started betting that Britain would be able to pull off its plans without defaulting or inflating away its debts. The pound strengthened as investors started funnelling money into British assets. But the glory moment was short-lived. By the end of the afternoon, the mood was more austere, and gilt yields were rising. They have been wafting higher ever since.
It wasn’t that there were any hidden surprises, as in the Brown years: the Budget documentation was remarkably frank, save for the fact, ferreted out yesterday by the IFS, that Osborne’s new measures will hit poorer families particularly badly. What markets were digesting was the task that lies ahead.
There are two main concerns: first, that the economy will suffer a further dip into recession; second, that the Cabinet simply cannot carry out the cuts Osborne has promised. While it is debatable whether there will be a deep double-dip, the second question hangs heavy. The Coalition, whose survival is predicated on the widespread consensus that severe action is necessary on the deficit, risks imploding once it has to take ideologically charged decisions on where to cut.
It has not yet dawned on most Lib Dems that, beneath the bonnet, this was a Tory Budget. The Lib Dem policies which made it through were either ones to which the Tories were sympathetic anyway (raising the income tax-free allowance) or stripped down so they make next to no real cash (capital gains tax). Nor are many Lib Dems aware that Mr Osborne has initiated the biggest stealth welfare cut in recent history: the decision to link tax credits and public sector pensions to CPI inflation rather than RPI will end up costing families a combined £5.8billion by 2014 – more than £250 for every household.
The Chancellor is now positing the idea that the only way to save government departments from the most extreme reductions is to chop welfare further. Even in a singleparty government with a pure ideological stance, this bargain would be difficult to pull off – let alone in a coalition comprising both ends of the political spectrum.
In order to force through his measures, Mr Osborne has devised a “star chamber” – made up of him, Danny Alexander, the Chief Secretary to the Treasury, and a few other ministers – that will judge how much each department should be punished financially. The plan is sensible, but does not go far enough. In such an ideologically diverse coalition, it would be better if the first word on cuts came from an independent voice.
In the 1920s, Lloyd George set up a committee of experts chaired by Sir Eric Geddes to do just that. It successfully carried out the biggest set of spending reductions in British history. Mr Osborne should consider something similar, because to impose the cuts unilaterally would be not merely controversial but “courageous”. And, as Sir Humphrey once said: “Controversial only means this will lose you votes, courageous means this will lose you the election.”