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12 November 2015updated 20 Aug 2021 9:22am

Leader: Mr Osborne’s tipping point

With the easiest and most popular changes behind him and challenges ahead, will the tax credit revolt mark a tipping point for George Osborne's economic reforms?

By New Statesman

The government’s recent defeat on reducing tax credits for the working poor demonstrated an unpalatable truth for George Osborne: the cuts planned for this parliament will be far harder to deliver than those in the last. The easiest and most popular changes, such as capping benefits for out-of-work families, have already been made. By now, austerity was intended to be almost over. But as a result of several years of anaemic growth, the UK is only halfway through the government’s fiscal consolidation. The revolt over cuts to tax credits, which support low- and middle-income workers, could prove a tipping point in the retreat of the state.

On 9 November Mr Osborne announced that new cuts of 30 per cent had been agreed with four departments – Transport; Communities and Local Government; Environment, Food and Rural Affairs; and the Treasury. Councils, including Conservative-led authorities, have warned that further reductions would leave them struggling to provide “vital services, such as caring for the elderly, protecting children, collecting bins, filling potholes and maintaining our parks and green spaces”. The Chancellor has yet to explain how starving local government of funds will be reconciled with his admirable vision of building a “northern powerhouse”.

Austerity is also having a deleterious effect on areas that are notionally protected, such as the NHS. A growing and ageing population, the rise in chronic conditions (such as obesity and diabetes) and the rising expense of medical technology are increasing cost pressures. By reducing social care provision, local government cuts will increase demand on the health service. Three-quarters of all hospital trusts are in deficit and 90 per cent expect to be so by the end of the year. As they struggle to reduce the shortfall, services will inevitably be reduced. Though the government has pledged to provide £8bn more for the NHS by 2020, that would require £22bn of efficiency savings – twice the rate achieved in the last parliament. Since 2010, health spending has increased by just 0.8 per cent a year, the lowest level over a parliament since 1945. Such privation reflects a programme driven by political strategy, rather than economic necessity.

The planned Budget surplus in 2019-20 would coincide with the next general election, which Mr Osborne hopes will be his first as Conservative Party leader. For this reason, the government refuses to take advantage of historically low borrowing costs and allow growth to erode the deficit. That the goal of a surplus is pursued without any significant increase in the taxation of the wealthy leaves the poorest, as in the case of tax credits, bearing ever more of the burden.

The state is forecast to shrink to 36.3 per cent of GDP by 2020 (from 47 per cent in 2009-10), just above the previous postwar lows of 35.8 per cent in 1957-58 and 36 per cent in 1999-2000 – and below the US’s current level of 37 per cent. The public spending increases introduced under New Labour, notably in health and education, will be almost entirely reversed. The government’s contention is that reform enables more to be delivered for less. As the experience of the NHS and local government demonstrates, the danger is of getting less for less. The UK faces a profound shift in the size and scope of the state – one for which many people are ill-prepared.

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This article appears in the 11 Nov 2015 issue of the New Statesman, Isis and the threat to Britain