A drop in the ocean

Osborne’s spending cuts will have no impact on this country’s long-term problems.

Earlier this week Chancellor George Osborne announced the government’s spending plans for 2015-16. In other words, he detailed where and with what severity the axe is to fall in the lead-up to the next general election. He was forced to do so because of the failure of his plan to eliminate the budget deficit – the amount by which government expenditure exceeds revenue in any given financial year – by 2015. The deficit stood at around 11% of GDP when the Conservative-led Coalition gained office in 2010; at best it has been reduced by around a third. The reasoning behind this ambitious policy was fundamentally political: Osborne was hoping, entirely fruitlessly as it has turned out, to sort out the nation’s finances by the time of the election, so that he would be in a position to cut taxes and ride home at the ballot boxes on a wave of popular support. The blame for the continued sluggishness of our economy cannot be attributed solely to the Chancellor – his hands are to an extent tied when uncertainty reigns in interconnected global markets – but equally it cannot be denied that his own plan is in ruins. Poor growth and lower-than-expected tax receipts have necessitated further public spending cuts, which were announced on Wednesday.

Additional savings for 2015/16 are to the tune of some £11.5 billion. With the exception of health, education and foreign aid – which continue to be ring-fenced – all other government departments negotiated cuts of around seven to ten percent. The reality is that Osborne did not need to detail these figures now – his rationale for doing so is again political. The Labour opposition has spent three years lambasting the pace of Tory cuts, which is supposedly inhibiting growth. However the Chancellor, an excellent political strategist, knows that this is hot air. Particularly in light of public mistrust of Labour’s economic credentials, stemming back to their perceived excessive spending during the boom years, party leader Ed Miliband cannot afford to convey too heavy an anti-austerity message. Osborne has set him and his party a trap – with the Conservatives’ budget plans for the months immediately following the general election now laid out, Miliband is being forced to explain how he would do things differently, or risk appearing disingenuous. The first signs are that this trap is working – Labour have already conceded that they would not borrow more to reverse the Coalition’s cuts. This could alienate their support base. Although Labour currently enjoy a healthy lead in the polls, the fact that the Conservatives are trusted more on the economy – the key battleground of the next election – may be significant.

The context of these spending announcements, then, is essentially political. That aside, will the cuts make any difference economically-speaking? Can they inject life into our struggling financial system? With public borrowing set to continue rising until at least 2016/17, when it is currently forecast to peak at around 85% of GDP, it is clear that something is still going badly wrong. Although our growth and unemployment figures are still significantly healthier than those across much of the Eurozone, the hard reality is that we are exiting recession more slowly than ever before. It is now five years since the global financial crash, and we are still flatlining. Will the fresh spending restraints alter the situation?

Unfortunately, it is extremely unlikely. The one saving grace is that our borrowing costs as a nation are still relatively low – the global financial community has confidence in our creditworthiness, notwithstanding the recent downgrade by Moody’s. The government’s commitment to austerity has reassured markets – if not for this our budget deficit would be under even more strain. State expenditure, however, is out of control. While big-spending departments like Defence and the Home Office have been scaled back significantly over the last few years, this in itself barely scratches the surface.

There is a growing acceptance among the UK public that current welfare spending is unsustainable. While only a few years ago people were fiercely protective of the welfare state, the majority are now cynical and even think that state benefits are too generous. This has been picked up on by the Conservative-led government, which has made a number of reforms. The total cost of benefits that any household can receive has now been capped at £26,000, so that no household gets more than the average working income. Unemployment benefits have been frozen at below-inflation levels. Households where one person earns at least £45,000 can no longer receive child support. After initially railing against the unfairness of these changes, the Labour opposition has now cottoned on and realised that public settlement has shifted. It recently stated that it would not reverse the Coalition’s child benefit policy.

Against this backdrop the most interesting features of Osborne’s spending announcements are those that concern welfare expenditure. After shadow chancellor Ed Balls recently announced that Labour would end subsidised winter fuel payments for the rich elderly, the Chancellor on Wednesday stated that pensioners living in warm European countries would lose these benefits based on a ‘temperature test’. There were also signs of policies designed to placate the right-wing press and Tory rebels – non-English speaking claimants of unemployment benefits will have to attend language schools or face losing their benefits, and job seekers will have to wait seven days before they can claim.

These reforms, however, are a mere drop in the ocean. By ring-fencing the two considerations that take up the most serious share of our state budget – pensions and health – Osborne has effectively abdicated the ability to make any meaningful dent in our nation’s debt problems. The root of the issue, yet again, is political. The British people still worship the NHS and react with horror to any hint of its privatisation or scaling down – former Chancellor Nigel Lawson famously stated that it is “the nearest thing the English have to a religion”. Meanwhile, the only age demographic in which the Tories lead Labour is the over-60s – accordingly the Conservatives pledged before the last general election to ring-fence pensions spending, and will be loath to back down on their promise now. Unlike the young, the elderly unfailingly turn out to vote in great numbers – for this reason they are feared by politicians.

The result, due to a rapidly ageing population, is a ticking time bomb. While our government tinkers around the edges, the real problem area in our country’s finances – entitlement spending – is left largely untouched. Governments are reluctant to tackle this issue for the simple reason that it would be political suicide; consequently the risks are left to grow and grow. What is really needed to avoid burdening future generations is radical reform of pensions now. The state pension age needs to rise – to around 70 – far quicker than is currently being planned, and from then on needs to be indexed to life expectancy rates. This would free up far more state money for infrastructure investment and the like. Such a policy would arguably be harsh, but would reflect the reality that today’s 65-year-olds are far healthier than their counterparts several decades ago. As a nation we badly need to start living within our means, otherwise the next financial crash will dwarf the most recent one. Our government needs to do more than make minor, ultimately ineffectual changes to departmental budgets.

Alex Rickets

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