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31 December 2010

Cameron is wrong: the spending cuts are ideological

The Prime Minister says the cuts are not due to his “ideological zeal”. Here’s why he’s wrong.

By George Eaton

In his New Year message, David Cameron attempts to rebut the charge that the government’s spending cuts are ideologically driven.

He writes:

I didn’t come into politics to make cuts. Neither did Nick Clegg. But in the end politics is about national interest, not personal political agendas. We’re tackling the deficit because we have to – not out of some ideological zeal. This is a government led by people with a practical desire to sort out this country’s problems, not by ideology.

Here are three reasons why he’s wrong.

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The coalition could have taxed more and cut less

There was an alternative to George Osborne’s £81bn spending cuts: higher taxes on the richest in our society. The Chancellor has chosen to reduce the deficit through a 59:41 ratio of spending cuts to tax rises in 2010/2011, rising to 77:23 by 2015/2016 (see Table 1.1 in the Budget).

But as the graphic below from the Economist shows, most deficit reductions have involved a far more even split between tax rises and spending cuts.

Deficit-reduction

The coalition’s deficit reduction programme relies more heavily on spending cuts than all but two of the largest OECD fiscal consolidations.

A higher level of tax rises on top earners would have enabled a more progressive programme of fiscal consolidation (the cuts are, by any measure, regressive) and, as I explain below, a less economically reckless approach.

The coalition could have raised more revenue through a tax on land value (69 per cent of which is owned by just 0.6 per cent of the population); a genuine crackdown on the £25bn lost each year through tax avoidance; a tougher, not a weaker, bank levy; and higher, not lower, corporation tax.

The decision to rely on punitive spending cuts to reduce the deficit was a political choice, not an economic necessity.

Spending cuts harm the economy more than tax rises

Economists are agreed that the government’s spending cuts will hit growth harder than tax rises would. As Duncan Weldon explains at the excellent False Economy, the fiscal multiplier (the effect on GDP of a tax rise or a spending cut) proves as much. The Office for Budget Responsibility’s own multipliers (see Table C8 in the Budget) show that the cuts will reduce growth by significantly more than the coalition’s tax rises.

As the shadow chancellor, Alan Johnson, noted in his pre-Spending Review speech: “We know from the Office for Budget Responsibility’s own figures that a spending cut hits growth twice as hard as a tax change – three times as hard when it’s capital spending.”

The government’s decision to ignore such economic evidence is the result of an ideological preference for spending cuts.

The cuts are permanent, not temporary

When asked by a Fire Brigade worker last summer if funding would be restored once the deficit has been addressed, Cameron replied:

The direct answer to your question, should we cut things now and go back later and try and restore them later, [is] I think we should be trying to avoid that approach.

The Prime Minister’s insistence that we should try to “avoid that approach” reveals an ideological attachment to the small state and to low levels of public spending. The result will be permanently shrunken public services.

The cuts will reduce public spending from 47.3 per cent of GDP in 2010/2011 to 39.8 per cent in 2015/2016 – equivalent to reductions made by Margaret Thatcher between 1979 and 1990. But for many on the right, this is just the beginning of their long war against the active state.