Leader: Feel the pain as Osborne swings his axe

The Britain that emerges from the cuts will be profoundly changed: more unequal and less confident.

The Spending Review is the biggest macroeconomic gamble any government has taken since the Great Depression. Cuts of this magnitude have not been seen since the 1920s, when David Lloyd George's coalition wielded the "Geddes Axe". Few doubt that the country's £155bn Budget deficit must be addressed urgently and that Labour cannot and should not evade responsibility for the depth of the crisis. But there is room for reasonable disagreement about the pace and severity of fiscal retrenchment and about the balance of tax rises to spending cuts. The coalition's refusal to recognise any alternative course and its dismissal of its critics as "deficit deniers" is intellectually dishonest.

We have been consistent in our opposition to the speed and scale of the coalition's cuts, which will exacerbate, rather than diminish, Britain's economic problems. Those who have warned against premature fiscal tightening are not isolated voices, or mavericks. Their number includes Ben Bernanke, chairman of the Federal Reserve and the pre-eminent scholar of the Great Depression, the Nobel laureates Paul Krugman and Joseph Stiglitz and President Barack Obama. George Osborne has been foolish to reject their counsel.

At best, the cuts will lead to sluggish growth of 1-2 per cent and, at worst, as our economics columnist, David Blanchflower, has long warned, they will lead to rising unemployment and a prolonged slump. There is little evidence that the private sector could sustain the economy through this period. A recent report by PricewaterhouseCoopers predicted that the sector will lose nearly half a million jobs as the cuts force it to curb its dependence on public-sector contracts.

Should growth go into reverse, as seems inevitable, Mr Osborne will have few monetary weapons at his disposal. Interest rates are already at record lows and the exchange rate has fallen sharply since the crisis began in 2008. By contrast, as Robert Skidelsky recalls in his essay on page 24, after the savage cuts of the 1981 Budget, Geoffrey Howe was able to loosen the money supply by cutting interest rates by 2 per cent. Insofar as the government has a plan B, it is for further quantitative easing. But with the cost of unsecured loans significantly higher than before the crisis, it is far from certain that another monetary injection will have the desired effect.

The Spending Review is not just an attempt to eliminate the structural deficit: it is an ideological attempt to reshape the British state. Nowhere is this truer than in welfare, which accounted for £192bn of government spending in 2009-2010. The transformation of Iain Duncan Smith, Work and Pensions Secretary, from headbanging Thatcherite to Profumo-like reformer is one of the more remarkable of recent times. His quest to "make work pay" is admirable. But the truth is that there are no jobs for many of the unemployed, nor will there be in the years to come. The number of long-term unemployed has more than doubled since 2008 to 797,000, while the number of vacancies has fallen to 467,000 - a jobs deficit of 330,000. In short: job creation in the private sector is not sufficient to offset job losses in the public sector.

Meanwhile, the abolition of child benefit for higher earners will have unintended consequences. The decision to make child benefit universal was never just a matter of income: it was an act of social solidarity that bound rich and poor alike into the welfare state. Progressives should remember Richard Titmuss's warning: services for the poor will always be poor services.

The coalition has vowed to be "tough but fair". However, there is little doubt that the cuts will hit the poorest hardest. While money spent on public services is the equivalent of 62 per cent of household income for the poorest fifth, it represents just 8 per cent for the richest fifth. It is those countries that have carried out the biggest deficit reductions in the past decade - Canada, Finland, the Netherlands - that have also suffered the largest increases in inequality. The decision to cut social housing by more than 50 per cent and to charge new tenants 80 per cent of the market rate will have dangerous consequences for the most vulnerable. At a time when the government has, absurdly, spent £5bn on two new aircraft carriers for which it has no jets, such cuts are intolerable.

The Britain that emerges from these years of austerity will be profoundly changed: more unequal and less confident. We face the prospect of permanently shrunken public services - the cuts will reduce spending from 47.7 per cent of GDP in 2009-2010 to 39.8 per cent in 2015-2016. For many Conservatives, this is still unacceptably high. The unpalatable truth is that, for the neoliberal right, the Spending Review is just the opening salvo in its long war on the active state.

This article first appeared in the 25 October 2010 issue of the New Statesman, What a carve up!