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19 March 2016

Iain Duncan Smith’s resignation shows George Osborne’s austerity model has reached its limits

The Chancellor must either abandon his surplus target or adopt a new strategy for achieving it. 

By George Eaton

The surprise is that it did not happen sooner. When George Osborne entered the Treasury in 2010 and began his austerity programme it was often predicted that a cabinet minister (most likely a Liberal Democrat) would resign within months in protest. Yet the government endured for a full five years without a senior frontbencher departing over economic policy.

This partly reflected the compromises made by Osborne as growth slowed. But significant deprivations were still imposed: the household benefit cap, the 1 per cent limit on working age benefit increases, the bedroom tax and £28bn of cuts to spending on the disabled. Yet not only did no cabinet minister resign, the Conservatives went on to win a parliamentary majority. Osborne’s strategy was said to have been vindicated. After this success, he doubled-down and reaffirmed his pledge to achieve a budget surplus by 2020.

But less than a year after the the Tories’ election victory, the Chancellor’s approach is in jeopardy. A cabinet minister has finally resigned over fiscal policy. In his letter to David Cameron, Iain Duncan Smith excoriated the government for cutting disability benefits while cutting taxes for high-earners (though it has been doing so for years) and for refusing to means-test universal pensioner benefits. Osborne’s “fiscal self-imposed restraints”, he warned, were leading to policies ever more perceived as “distinctly political rather than in the national economic interest”.

The Chancellor is discovering that even with a Conservative majority, it is hard to balance the budget on the backs of the poorest. Only three months ago, he was forced to abandon planned tax credit cuts after a Tory revolt. He is now poised to similarly backtrack over reductions to Personal Independence Payments (PIPs) for the disabled. The two largest revenue-raising measures  (£3.4bn and £4.4bn) in his recent fiscal statements have both been defeated

Osborne’s economic imperative of a budget surplus is colliding with the political reality of a minute majority (12 seats). A pre-Budget revolt over proposed pension tax relief changes forced him to concede even before announcing them. Almost all Tory MPs support austerity in theory but they increasingly oppose it in practice.

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The easiest and least divisive cuts have already been made; the Conservatives’ election pledges have further limited Osborne’s room for manoeuvre. Faced with a Labour opposition they feared could oust them from power, the Tories vowed not to raise income tax, national insurance or VAT, and to protect spending on the NHS, pensioner benefits, schools, and international development (defence has since joined the list). More than half of all public spending is ring-fenced and Osborne has pre-emptively denied himself obvious sources of revenue. It is this choice, and a deficit of £72.2bn, that explains the political blunders of recent times. All this while the economy continues to grow at a comparatively healthy rate of 2 per cent.

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If his leadership hopes are to endure (and Osborne may be irrevocably damaged), the Chancellor cannot afford to keep proposing measures he lacks the political strength or will to implement. He must either abandon, or miss, his surplus target, or adopt a new strategy for achieving it. The latter could involve progressive tax rises of the kind that Osborne has at times considered (such as a mansion tax) but not pursued.

It is an irony that his task would have been easier had the coalition between the Conservatives and the Liberal Democrats continued. This partnership would have given him political cover to either abandon his surplus target or to impose tax rises (as Osborne himself privately noted before the election). The Conservative manifesto, designed as a negotiating position, was often described by economists as “impossible” to implement. Osborne is discovering how right they were.