Osborne will need even-bigger cuts to stick to his plan

The Chancellor must find £48bn in extra spending cuts or tax rises to meet his main deficit target.

The Autumn Statement is now just over three weeks away and a sense of déjà vu hangs over the scene. In the run up to the same event last year it was plain that poor economic performance meant that the Office for Budget Responsibility (OBR) would be the bearer of bad news for the Chancellor. And so it is again.

After a grotty economic performance in 2011, last year’s Autumn Statement was always going to deliver bad news. The Chancellor announced the need for a £15bn reduction in overall spending by 2016-17 in order to meet the government’s fiscal mandate of eliminating the structural deficit in five years.

But that wasn’t the whole story. Much social security spending is driven by things beyond the government’s control: rising rents push up the housing benefit bill, and retiring baby boomers raise the overall cost of the basic state pension. So to constrain overall spending in the face of a rising benefits bill, the Treasury was implicitly seeking a further £11bn of savings. In total, the plan was then to find some £26bn in spending cuts – since tax rises weren’t part of the plan – by 2016-17 in order to achieve the government’s aims.

Unfortunately, this year things seem depressingly familiar. At the Budget, the OBR predicted that economic growth would be 0.8 per cent this year, but independent forecasters now think it will be more like a 0.3 per cent contraction. As a result, public borrowing is running 10 per cent above the OBR’s March forecast. None of this is great news, but it wouldn’t be so bad if the higher borrowing was a temporary reflection of the weakness in the economy that would resolve itself once things get back to normal. Unfortunately, the Social Market Foundation’s analysis – part of a joint report produced with the RSA yesterday - shows that this doesn’t seem to be the case. At least not according the models the OBR uses.  

Unemployment has been falling for most of this year. While that’s a good news story in itself, it implies that the economy may have moved closer to its capacity. But with less far to bounce back, a bigger chunk of this year’s £122bn underlying annual government borrowing will remain when output finally does reach its full capacity. And the only way to fill that hole is to close the gap between revenue and spending.

Our analysis, using the OBR methodology, suggests that getting the government’s Budget 2012 plans back on track would require a further £22bn of spending cuts or tax rises by 2017-18. The Chancellor has some room to ease up on his plans and still hit his mandate, but whatever way you look at it, the OBR’s models suggest that a lot more fiscal pain is on the way. Combined with the cuts already planned, the total size of the task after 2014 could be £48bn by 2017-18.

If the Chancellor sticks to his plan to keep taxes unchanged and cut £10.5bn from the social security budget, most of the work will be done by cuts in public services. That would require 11 per cent real-terms budget reductions in every department over the first three years of the next parliament. And if health, education and international development spending were to be protected, the impact elsewhere would rise to an eye-watering 23 per cent.

All of this would come on top of the spending squeeze that’s already underway and planned to run until 2015. The consequences of the eight years of cuts would be to decimate spending in some areas, with some departments over 40 per cent smaller once the public finances are back to balance.

It must be hoped that the OBR’s models are wrong in their implications and that the economy is in fact still some distance from its potential level. But if the OBR’s advice follows it past form, the news will be grim, requiring cuts that will run deep into next parliament. Against a background of four years’ unprecedented cuts, a further squeeze on anything like the scale implied by the SMF’s analysis will represent the central issue at the next election, forcing on the electorate stark decisions about the kind of public services we want in the UK.

But we mustn’t have a re-run of the 2010 election, in which the three parties connived in presenting vague plans and disingenuous language to mask the scale of the problem. Osborne made a bold decision in setting up the independent OBR. Perhaps, before the next election he should make another, and require it publicly to adjudicate on the detail and viability of each of the main parties’ plans. If the electorate is to choose, it must be informed.

Ian Mulheirn is director of the Social Market Foundation

George Osborne will deliver the Autumn Statement on 5 December. Photograph: Getty Images.

Ian Mulheirn is the director of the Social Market Foundation.

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The Tories' aim is to put Labour out of business for good

Rather than merely winning again, the Conservatives are seeking to inflict permanent damage on the opposition. 

The Conservatives are numerically weak but politically strong – that is the peculiarity of their position. Their majority is the smallest of any single-party government since October 1974. Yet, to MPs at the Tory conference in Manchester, it felt like “2001 in reverse”: the year of Tony Blair’s second election victory. Then, as now, the opposition responded to defeat by selecting a leader, Iain Duncan Smith, who was immediately derided as unelectable. Just as Labour knew then that it would win in 2005, so the Conservatives believe that they have been gifted victory in 2020. David Cameron has predicted that the party’s vote share could rise from 37 per cent to a Thatcherite 43 per cent.

For Cameron and George Osborne, who entered parliament in 2001, this moment is revenge for New Labour’s electoral hegemony. They believe that by applying Blair’s lessons better than his internal successors, they can emulate his achievements. The former Labour prime minister once spoke of his party as “the political wing of the British people”. In Manchester, Cameron and Osborne displayed similarly imperial ambitions. They regard Jeremy Corbyn’s election as a chance to realign the political landscape permanently.

Seen from one perspective, the Tories underperformed on 7 May. They consistently led by roughly 20 points on the defining issues of the economy and leadership but defeated Labour by just 6.5 overall. It was their enduring reputation as the party of the plutocracy that produced this disparity. Those who voted for Labour in spite of their doubts about Ed Miliband and the party’s economic competence may not be similarly forgiving of Corbyn. To maximise their gains, however, the Tories need to minimise their weaknesses, rather than merely exploit Labour’s.

This process began at conference. At a dinner organised by the modernising group the Good Right, Duncan Smith, Michael Gove and the Scottish Tory leader, Ruth Davidson, affirmed their belief that, contrary to Thatcherite orthodoxy, inequality is a problem. Only the Business Secretary, Sajid Javid, an admirer of the libertarian heroine Ayn Rand, insisted that equality of opportunity was the defining metric.

George Osborne’s assured speech was most notable for his sustained appeal to Labour voters. Several opposition MPs told me how unsettled they were by the Chancellor’s declaration that Labour’s new leadership calls “anyone who believes in strong national defence, a market economy and the country living within its means” a Tory. He added, “It’s our job to make sure they’re absolutely right. Because we’re now the party of work, the only true party of labour.” The shadow minister Jonathan Reynolds told me: “We’ve got to be extremely clear that this is not business as usual. This is a real attempt by the Tories to put us out of business – possibly for ever.”

The Conservatives’ aim is to contaminate Labour to the point where, even if Jeremy Corbyn were deposed, the toxin would endure. For those opposition MPs who emphasise being a government-in-waiting, rather than a protest movement, the contrast between the high politics of the Tory conference and Corbyn’s rally appearance in Manchester was painfully sharp. They fear guilt by association with the demonstrators who spat at and abused journalists and Tory delegates. The declaration by a rally speaker, Terry Pullinger, the deputy general secretary of the Communication Workers Union, that Corbyn’s election “almost makes you want to celebrate the fact that Labour lost” was regarded as confirmation that some on the left merely desire to run the party, not the country.

But few Tory MPs I spoke to greeted Corbyn’s victory with simple jubilation. “It’s a great shame, what’s happened to Labour,” one said. “We need a credible opposition.” In the absence of this, some fear the Conservatives’ self-destructive tendencies will reassert themselves. The forthcoming EU referendum and leadership contest are rich in cannibalistic potential. Tories spoke forebodingly of the inevitable schism between European Inners and Outers. As the Scottish experience demonstrated, referendums are almost never definitive. In the event of a close result, the party’s anti-EU wing will swiftly identify grounds for a second vote.

Several cabinet ministers, however, spoke of their confidence in Cameron’s ability to navigate the rapids of the referendum and his pre-announced departure. “More than ever, he’s the right man for these times,” one told me. By this December, Cameron will have led his party for ten years, a reign exceeded in recent history only by Stanley Baldwin, Winston Churchill and Margaret Thatcher. That the Conservatives have so far avoided cataclysm is an underappreciated achievement.

Yet there are landmines ahead. An increasing number of MPs fear that the planned cuts to tax credits could be a foul-up comparable to Gordon Brown’s abolition of the 10p tax rate. Despite the appeals of Boris Johnson and the Sun, Cameron and Osborne have signalled that there will be no backtracking. At such moments of reflection, the Tories console themselves with the belief that, although voters may use Corbyn as a receptacle for protest (as they did Michael Foot, Neil Kinnock and Ed Miliband), they will not elect him. They also acknowledge that the current Labour leader may not be their opponent in 2020. The former paratrooper Dan Jarvis is most often cited as the successor they fear. As with Cameron and Blair, his relative lack of ideological definition may prove to be a strength, one MP suggested.

William Hague is fond of joking that the Tories have only two modes: panic and complacency. If the danger before the general election was of the former, the danger now is of the latter. 

George Eaton is political editor of the New Statesman.