According to George Osborne’s original plan, the £11.5bn of cuts he announced in the Spending Review on Wednesday 26 June should not have been necessary. When he published his deficitreduction programme in 2010, the Chancellor assured voters that austerity would not stretch beyond 2015. “We have already asked the British people for what is needed,” he declared in the 2011 Budget, “and we do not need to ask for more.” However, because of the near absence of growth since the election that resulted in the creation of a coalition government, the axeman is still swinging his blade. Mr Osborne is expected not to meet his chosen target of eliminating the so-called structural deficit until 2018. It is likely that Britain will experience a full decade of austerity before relief is in sight.
The results of Mr Osborne’s strategy were both predictable and predicted. As early as October 2009, when he was being lauded by much of the British press as the country’s potential economic saviour, the New Statesman warned that “the only economic plan he seems to have is for attempting to balance the books. He does not have a plan for growth. He has a plan for a lack of growth.” But Mr Osborne caricatured his opponents as “deficit deniers” and dismissed calls for a “plan B”, led by our economics editor, David Blanchflower, as Keynesian dogma. Despite the return of growth, the economy remains 2.6 percentage points below its pre-recession peak; this is the slowest recovery since the 1870s.
The Chancellor’s decision to hold the review nearly two years before the end of the current spending period had more to do with politics than economics. By announcing spending limits for the first year after the next election, the Conservatives’ chief political strategist sought to draw the battle lines in his party’s favour. He knew that if Labour accepted his plans it would be accused of ideological surrender and that if it rejected them it would be accused of fiscal recklessness.
As apprentices of Gordon Brown, who similarly used the baseline as a weapon of political war, Ed Miliband and Ed Balls were well prepared for this trap. Their response was to accept Mr Osborne’s current spending limits, while leaving open the possibility of greater capital investment. For political and economic reasons, it was the right decision. While the public remains sceptical of the Keynesian case for higher borrowing, polls show that it recognises the benefits of investing in areas such as housebuilding that boost output in the short and long run, generate employment and aid deficit reduction. Because of its independent monetary policy and above-average debt maturity, Britain can afford to borrow for growth without fear of a dangerous rise in bond yields. The risks of inaction, in the forms of permanently lower growth and higher unemployment, far outweigh the risks of action.
In his NSessay in March, the Business Secretary, Vince Cable, urged Mr Osborne to borrow to invest, rightly noting that this would not “undermine the central objective of reducing the structural deficit” (a measure that excludes capital spending) and could even assist it “by reviving growth”. The Chancellor’s response fell far short of what was required. By choosing to fund capital spending increases through cuts elsewhere, rather than borrowing, and by delaying the greater part of the investment until after 2015, he has denied the economy the stimulus it desperately needs.
For political purposes, the Chancellor has postponed most of the remaining cuts until after the next general election. Based on current projections, according to the Resolution Foundation, £26bn of further reductions will be needed between 2016 and 2018 to eliminate the structural deficit, a figure that would require the next government to accelerate the cuts by nearly 50 per cent. Should the current ring fences around Health, International Development and Education remain, some departments will have had their budgets more than halved by 2018, with a 55 per cent cut to Communities and Local Government and a 64 per cent cut to the Foreign Office, as well as a 46 per cent cut to the Home Office and a 38 per cent cut to Defence. Alternatively, the present pace of cuts could be maintained but only through an additional £10bn of welfare cuts or tax rises.
At the last election, the Conservatives and Labour engaged in a mutual conspiracy of silence. David Cameron told voters that he had “no plans” to raise VAT, that he “wouldn’t means-test” child benefit and that he would send away any cabinet minister who proposed “front-line reductions” to services. While pledging to halve the deficit over four years, Gordon Brown could rarely bring himself even to mention the word “cuts”.
If the next government is to win the legitimacy required to justify further sacrifices, this grand deception must not be repeated. The Labour Party should not avoid making the case for a significant increase in taxes on static assets, such as property and land, and on environmental “bads”, to help create a more resilient tax base. A crackdown on tax avoidance by corporations and individuals is essential.
By refusing to contemplate any major changes to fiscal policy, Mr Osborne hopes to make a political virtue of his obstinacy.His message of fiscal discipline may well prove enough to carry the Conservatives to a narrow victory – but he may end up inheriting the wind.