First published in the Telegraph on 23 June 2010
BRITAIN must endure a period of austerity as deep and searing as the one which preceded the General Strike of the 1920s, following a Budget described by the Chancellor as “tough but fair”. George Osborne received plaudits from ratings agencies, international economic organisations and investors after revealing that he intends to cut the budget deficit by signifi-cantly more than Labour.
The cuts Mr Osborne sketched out yesterday are deeper than those the Greek government has had to commit to. They are of similar depth to those imposed by the Geddes Committee in the early 1920s – Britain’s worst stretch of austerity in modern history. The Chancellor said that he would commit to a mandate of removing the structural current deficit, which adjusts for the effect of the economic cycle and ignores investment spending, and start cutting into the national debt by 2015-16.
However, he added that he would achieve this goal a year earlier than expected.
The emergency Budget committed to some £40bn of annual cuts in the deficit by the final year of the Parliament, on top of the £73bn inherited from the previous Government.
When all the cumulative deficit reduction between 2010 and 2015 is accounted for, it will amount to just under half a trillion pounds.
Markets reacted warmly to the statement, with the yield on the benchmark 10-year government bond falling during the Chancellor’s speech by 0.1 of a percentage point to 3.4pc and sterling strengthening against a basket of other currencies.
Traders said that, although some question marks remain over the optimism of the economic forecasts provided independently by the Office for Budget Responsibility, the overall tone was highly encouraging. The Chancellor has pledged his reputation on safeguarding Britain’s AAA credit rating. David Riley of rating agency Fitch offered the document a ringing endorsement, saying: “It sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public fi-nances and its AAA status.
“However, securing the reductions in ‘unprotected’ departmental and welfare spending will be very challenging.”
The Government has yet to reveal precisely how it will achieve the spending cuts it mapped out yesterday, which are equivalent to an annual £32bn by the final year of the Parliament, on top of the £52bn already pledged by Alistair Darling. It will provide more details in October’s Spending Review.
However, according to Martin Weale of the National Institute for Economic and Social Research, the cut in real government consumption — the broadest measure of state activity — will amount to 10pc between now and 2015, far deeper than the 1.5pc cuts in the 1970s or those in the 1950s and 1930s.
The only equivalent austerity period in history is the 11pc of cuts under Lloyd George, which many blame for the demise of the Liberal Party and the eventual spiral towards the General Strike of 1926.
Mr Weale said: “This is something absolutely everyone is going to notice. The policy is made more acute by ring-fencing things, and cutting by 25pc in unprotected departments.”
Under the Government’s new fiscal plans, annual borrowing will no longer hit £71bn in 2014-15, as was projected under the Darling blueprint, but £37bn thanks both to direct deficit cuts, a lower debt interest cost and better market rates.
The national debt in 2014-15 will be 69.4pc of gross domestic product rather than 74.4pc. As a result, the Government has reduced the planned sales of its gilts from £187bn this year to £165bn.
Mr Osborne pitched the cuts as necessary to prevent a sovereign debt crisis such as those which have dogged euro members in recent months. Greece has been forced to implement unprecedented spending cuts following an International Monetary Fund bail-out, while Spain and Portugal have faced questions over their solvency.
However, the Government’s plans look extensive even in comparison to the emergency cuts implemented by European nations, according to Mike Devereux of Oxford University’s Centre for Business Taxation.
He said: “The deeper cuts announced today exceed those identified by the Greek government, which faces a much greater fiscal crisis.”
In an unusual move, Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development, spoke out to congratulate Mr Osborne on his plans. “The Budget announced today by the UK Chancellor of the Exchequer is a courageous move,” he said.
“It provides the necessary degree of fiscal consolidation over the coming years to restore public finances to a sustainable path, while still supporting the recovery.” According to the Treasury’s own analysis, Britain’s richest families will face a hit of almost £1,600 off their annual income thanks to a combination of tax rises and spending cuts, including an increase in VAT which experts warned could set back the recovery permanently.
The VAT increase from 17.5pc to 20pc -at which level it will be average compared to other European nations -will generate an annual £12.1bn as soon as next year, though this is balanced out by a number of tax giveaways, including a plan to increase individuals’ tax-free salary allowance by £1,000.
Mr Osborne said this meant that by the end of the Parliament he would have achieved his pledge to cut spending by almost £4 for every pound of extra taxes.
Those on benefits will also suffer after Mr Osborne switched indexation of bene-fits and public sector pensions from the Retail Prices Index to the lower Consumer Prices Index – a move which will generate £5.8bn a year by the end of the Parliament.