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1 March 2011

Osborne’s misleading cuts claim

The claim that Labour would have cut spending by just £2bn less doesn’t stand up.

By George Eaton

With the Budget just three weeks away, George Osborne has attempted to define the terms of debate with a polemical assault on Labour’s economic policy in today’s Guardian. Along the way, he repeats one of his favourite retorts to the government’s critics: that Labour would have cut spending by just £2bn less than the coalition in 2011/2012. Here are three reasons why Osborne’s claim is misleading.

1. The coalition cut spending by £6.2bn in 2010/2011, with programmes including the Future Jobs Fund (described by Frank Field as “one of the most precious things the last government was involved in”) and the Child Trust Fund wound up, and the 20,000 extra university places promised by the Brown government reduced to 10,000. Labour would have made no cuts during this period. Thus, the true gap between the parties’ spending plans is £8.2bn, not £2bn.

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2. Ed Miliband has abandoned Alistair Darling’s 67:33 ratio of spending cuts to tax rises in favour of a 60:40 split. As a result, the difference between Labour’s cuts and the coalition’s would be greater than £2bn this year. The switch to a 60:40 ratio means that total departmental cuts have fallen from £44bn to £34bn, compared to the coalition’s cuts of £61bn.

But Osborne has highlighted the need for Labour to explain how it would raise more from taxation beyond merely repeating the bonus tax and reducing tax avoidance. As I’ve argued before, Labour should revive the the original Lib Dem plan to tax capital gains at the same rate as income (the Tories limited the rise to 28 per cent), a change that would raise £3.2bn. The Miliband team should also look at introducing a “mansion tax”, a policy supported by David, but not Ed, during the leadership campaign. A 1 per cent a year levy on homes worth more than £2m would raise at least £1.7bn.

3. However, Labour can legitimately argue that the government’s spending cuts will hit growth harder than tax rises would. As Duncan Weldon recently explained at 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 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.” A faster pace of economic growth means that fewer spending cuts are needed to reduce the deficit.