Trimming Services

EVEN George Osborne’s fiercest critics would have to admit he was between a rock and a hard place when he set out the new budget on June 22. Britain has its biggest fiscal deficit since WWII – and, according to May’s IMF forecasts, it faces the toughest recovery of all the G20 countries. No one doubts that austerity is needed to reduce the deficit. But it’s less clear whether it should come sooner or later, and how public spending cuts should be balanced with tax rises. Martin Wolf set out the dilemma in the Financial Times: “delayed retrenchment poses the danger of inflation and even default; premature retrenchment threatens recession and even deflation”. What Osborne had to produce, as Julian Astle said in the Guardian, is a “Goldilocks budget” – not too much retrenchment too soon or too little too late. He opted for huge cuts to public services – most government departments will see their budgets reduced by some 25%. But was he right to do so? >>

 

1. We’re in a desperate situation, and only cuts can save us

BRITAIN is in a truly terrible economic position. We are hugely indebted, and the Office of Budgetary Responsibility (OBR), set up by George Osborne to assess the state of the economy independently from political interference, has shown that Alistair Darling significantly overestimated our ability to bounce back from the recession – growth is far more likely to be around 2.6% per year, rather than Alistair Darling’s hopelessly optimistic estimate of 3.25%. Our structural deficit – what we need to borrow that is unrelated to the increased spending due to economic downturn – stands at 8.8% of GDP, or £123.7 billion this year, compared with Darling’s forecast of 8.4% of GDP. We can’t keep racking up debt like this – things are so bad that there is no longer a case for Keynesian spending. Borrowing further to avoid public spending cuts will result in bankruptcy.

2. We have to retain investors’ confidence

THINGS will only get worse if the markets turn on us as they have already turned on Greece, Portugal and Spain, boosting the cost of government borrowing – and, as a consequence, the cost of household borrowing. The financial markets have given us an easy ride so far because they have been expecting the new government to take firm action on the deficit. If that does not happen, our creditworthiness will suffer. We can’t let that happen – interest rate rises of a few percentage points would push huge numbers of mortgage borrowers into crisis. Some might say that we aren’t like Greece – our public debt was 72% of GDP in 2009, whereas Greece’s was 119%. But these headline figures ignore the UK’s huge hidden debts, such as private finance initiative schemes which are off-balance sheet and public sector pensions.

3. We need to make space for the private sector

THE public sector is never going to deliver an economic recovery – only the dynamic, enterprising, innovative private sector can do that. But we are propping up our armies of civil servants – not to mention subsidising a hard-core of welfare recipients who have no motivation to find work – at the cost of the entrepreneurs and business people who we need to be supporting and encouraging. As David Cameron said, “It has been…a tale of two economies: a public sector boom and a private sector bust.” Running a deficit to buoy up the public sector will only crowd out the private sector.

4. Acting later will certainly be worse for us

EVEN those who like big government, and believe that civil servants are invaluable, industrious and well worth their salaries have had to accept that we will have to reduce what we spend on them sooner or later, given our economic situation. And given that choice, sooner is better than later. As Nick Clegg said, it isn’t progressive to spend more on servicing debts than on schools and services, as will be the case unless we get the deficit under control immediately. We have to get to grips with the situation now. As Ros Altmann said in the Guardian: “promising to start a diet tomorrow does not help you become slimmer.”

5. Cuts need to go further than Osborne is likely to

THERE may well be something a little nasty in the way the Tories are protecting their core voters from the worst of the pain. But that means the cuts should be wider, not narrower. The NHS should not be off limits, nor should the police or schools be shielded – all have had their bureaucracy expanded under Labour. As Reform, a centre-right think tank said, we should raise retirement age and cut the civil service headcount by 2% a year every year – as well as privatising the motorways and putting VAT on food, children’s clothes and printed matter. That would be fair, and would stop squeezing out the private sector.

 

1. Don’t exaggerate the problems

THE recent report from the Office of Budgetary Responsibility showed that the economy is in far better shape than George Osborne and David Cameron have been telling us – the deficit is smaller than expected, tax revenues are set to be better, and unemployment will be 200,000 lower than feared. Alistair Darling was quite right to ask for an apology for the coalition’s scaremongering. We are certainly indebted, but nowhere near bankrupt. Dealing with the deficit is important, and will require cuts to public spending, but not so urgent it can’t wait until the economic recovery is more secure.

2. We need to forget about the markets

IT WAS never likely that the markets would downgrade our debt, whatever actions George Osborne took. Things would have had to be a lot worse before we were in Greece’s boat. We have never defaulted on our debts, our public and private sectors have far more integrity, and our debts have a far better-managed range of maturities. There is no evidence that markets are panicking about UK government bonds: long term interest rates are low and there is no shortage of demand for them. The whole point about the kind of Keynesian recession we’re in is that people are trying to increase their savings in safe assets, just the sort that the government supplies by running a deficit.

3. The private sector can’t save us on its own

THERE is no reason to expect the private sector to fill the economic vacuum when the public sector shrinks. After all, if China, Japan, the eurozone and Britain all simultaneously switch to austerity, there will be no one left to import all the private sector’s exports – making an emphasis on export-led growth a logical absurdity. The truth is that we are still in a Keynesian-style downturn characterised by the “paradox of thrift”: when everyone simultaneously tries to save, incomes fall and the desire to save is frustrated. The only way of avoiding this kind of destructive spiral is for public spending to step in and take the slack until investment and confidence return. As Martin Wolf said in an open letter to George Osborne in the Financial Times, David Cameron’s comments on the “public sector boom and a private sector bust” are dangerous and nonsensical.

4. Cuts could lead to greater deficits

SOME – especially those with an underlying preference for small government – might think it will be easy to trim fat from the public sector, but let’s consider the practicalities. Cuts cost money, in redundancy payouts and then in unemployment benefits. According to the Chartered Institute of Personnel and Development (CIPD), it’s likely that 750,000 public sector jobs will be lost over the next five years. So Osborne’s public spending cuts could well lead to a downward economic spiral: cuts reduce economic activity, which reduces tax revenues and increases benefit-spending, which increases deficits and requires further cuts.

5. Cuts will hurt the poorest most of all

THERE’S nothing progressive about cutting spending now. As Polly Toynbee said in the Guardian, the poorest are disproportionately high users of public services, especially since more young and elderly people fall into that category. It would be far fairer to raise taxes – particularly those that affect the richest, rather than increasing VAT which hits the poorer hard since they spend a higher proportion of their income on goods and services.

 

 

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