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4 May 2015updated 06 May 2015 3:37pm

Regressive politics: George Osborne wants to shrink the state to pre-1945 levels

Mr Osborne's Economic Experiment reveals the chancellor's tricks.

By Peter Hain

Mr Osborne’s Economic Experiment: Austerity 1945-51 and 2010–
William Keegan
Searching Finance, 166pp, £9.99

In Tinker Tailor Soldier Spy, John le Carré labelled the supposed secrets that MI6 was getting from its Moscow source as “witchcraft”. Thanks to William Keegan’s masterly new book, we now know that Britain’s top spy novelist has labelled George Osborne’s austerity policy as “planned penury”, especially for the vulnerable. Keegan probably prefers “witchcraft” for that, too.

Britain’s Chancellor hides his porkies in plain sight. Like le Carré’s characters, he doesn’t use his real name: it’s actually Gideon (George is what le Carré would call his “work name”). Two further convenient falsehoods are Osborne’s claim that excessive Labour government spending rather than reckless bank lending caused the financial crisis and his denial of having delayed Britain’s economic recovery by as many as three years with his savage spending cuts and tax rises. These are two Tory deceits that Keegan lays bare in a concise but devastating indictment of the coalition’s economic policy and the Conservatives’ intentions.

Never has a book been better subtitled. Keegan does more than compare two episodes of British austerity. First, he accepts that, because of the Second World War, there was no alternative in 1945. But at a time when defeating Hitler had bequeathed a mountain of national debt, Clement Attlee’s Labour government created the NHS, together with other critical components of the welfare state – projects that the neoliberal dogmatists today leading the Tories would doubtless have insisted were “unaffordable”. Second, ominously for our future, Keegan makes plain that if Osborne has his way there is no end in sight to the current attack on public spending, unless or until the state has been shrunk back to pre-1945 proportions.

Keegan shows that the Chancellor’s aim is not really to reduce the size of the Budget deficit. It is to reduce the size of the state, with the focus of Tory austerity on the same welfare budgets – for the poor and the disadvantaged – whose foundations were laid during that postwar austerity.

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In December 2014 Robert Chote of the Office for Budget Responsibility (OBR) stated that Osborne’s plans would result in the cutting of public spending as a share of GDP to levels not seen since the 1930s. Paul Johnson of the Institute for Fiscal Studies (IFS) has warned of cuts “on a colossal scale”. Osborne wasn’t exaggerating when he claimed last April to have imposed the tightest and most sustained Budget squeeze of any major advanced economy. That is exactly what he did and, if he gets his way, he plans to do it all over again after 2015.

The latest IFS Green Budget shows that Osborne is less than halfway through his programme of public spending cuts. So far, £49bn of cuts have been made to “unprotected” departmental spending (in every­thing from policing and social care to defence, except health, schools and foreign aid). Another £51bn of cuts is to come by 2020. That’s a £100bn cut in unprotected spending between 2010 and 2020 – almost as much as we spend on the NHS each year.

It is difficult to grasp the scale of these measures. They would ensure that between 2010 and 2020, total departmental spending (including health, schools and foreign aid) would have faced a real-terms cut of 22 per cent. Unprotected spending would have been cut, in real terms, by 41 per cent.

Fortunately, the IFS also shows that there is an alternative to Tory austerity. If the Oxford Economics think tank is correct about the spare capacity in the UK economy, no more spending cuts or tax rises would be needed after April 2015 to realise Labour’s plan for a balanced current Budget (excluding public investment) in the next parliament. Oxford Economics reckons that Britain’s output gap is six times bigger than the OBR’s assessment, leaving plenty of room for fast catch-up growth. This suggests – as Keegan demonstrates – that the Budget deficit is cyclical, not structural, and would evaporate with economic growth. No surprise there. Jonathan Portes of the National Institute of Economic and Social Research said so in 2013. The respected economists Paul Krugman, Simon Wren-Lewis, Bill Martin and Bob Rowthorn have all made the same fundamental point.

Perhaps now the message will get through. Britain needs a government that will restore momentum to our already fading recovery by launching a fiscal stimulus based on extra public investment. Keegan’s book is a wonderful antidote to neoliberal austerity’s suffocating grip on the Westminster bubble of journalists and politicians.

Peter Hain is a former Labour cabinet minister and the MP for Neath. His book “Back to the Future of Socialism” is published by Policy Press