Last week, Chancellor of the Exchequer, George Osborne, revealed the full extent of the coalition Government’s sweeping spending cuts. The headline statistic is that £81bn will be cut over the next four years from public spending.
The cuts announced in the spending review are deep overall, but not distributed evenly over individual departments. As a result, there are clear Spending Review winners and losers.
As the UK is haemorrhaging debt expenditure to the tune of £120m per day, something bold needed to be done but did Osborne go to far? Has he taken an unnecessarily large macroeconomic gamble? Or will the UK be the focus on international envy in five years time following from prudent decisions taken today?
Where did the axe fall?
For the National Health Service and the Department for International Development (controls the UK’s international aid) the axe didn’t fall at all. Both these departments were ring-fenced from cuts; the NHS sees spending increasing in real terms and DFID’s budget heads on towards a pre-set target of 0.7% of GDP.
Communities and Local Government, the department Eric Pickles controls, saw the biggest proportional loss with an overall decrease of 51% in its budget. Both the Home Office and the Justice department face cuts amounting to 23%; meaning the police, border-control and the prison service are likely to see significant losses.
Two relative winners (emphasis on the word relative) have been education and defence. Education has partially been ring-fenced with cuts totalling a less savage 3.4%, whilst defence, an area in which some commentators are arguing has got off lightly, was slashed by 7.5%. However, many Conservative MPs and members will be angered that the defence budget fell at all.
The Coalition’s views
Fairness, fairness, fairness. This was the message that Osborne and the coalition wanted people to hear loud and clear. The coalition even got the Treasury to give evidence showing the progressive nature of the cuts. Another issue that was emphasised heavily was the sentiment of togetherness. It is not hard to see why Osborne chose to champion this phrase though, the Conservatives can’t afford to ignite any kind of class-war debate. Osborne also asserted that his actions were bringing the country back from the “brink of bankruptcy”.
The Opposition’s views
Alan Johnson, Shadow Chancellor of the Exchequer, claimed the coalition were ‘Deficit Deceivers’. He pointed out that back in 2007, the Conservatives were not calling for reduced public expenditure, and went on to claim they had wanted even higher spending.
Johnson also stated that the announcements in the spending review were a “reckless gamble with people’s livelihoods”. The opposition highlighted the chance that we could slide back into recession as a result of the cuts, and Johnson made a direct comparison to the austerity measures in Ireland.
What the IFS had to say
The Institute For Fiscal Studies (IFS) criticised the fairness of the Review, commenting that families with children will be one of the main groups hit. The IFS claims that the average family with children will lose £1,964 of its net income of £29,242 a year by 2014-15; whereas, pensioners will lose a lot less.
A lot of media outlets have also grabbed at the bar charts released by the IFS which show that the spending cuts are ‘regressive’. Dismissing the data in one word doesn’t accurately reflect the IFS analysis though – proportional losses between income groups vary very little.
What they did right
All parties agree that something had to be done. What forms that takes, and the timing of cuts can vary greatly, but at least decisive action has been taken and it is too soon to judge the effects. Cuts today may spare future generations of tax-payer (including students today) from excessive taxation bills.
Small cuts to the extensive NHS budget could have meant less severe losses for other departments
Efficiency savings motivated by budget pressure are a positive for tax-payer value for money, and these savings may not have been induced without the cuts being made.
Osborne did not back down from the immense challenge he has been given, whether you agree with the plans or not, he has set out a clear direction and not shied away from hefty cuts. The result of this is that the UK currently has a strong standing in sovereign debt markets.
What they did wrong
There was great scope to reduce universal benefits that was not taken. Introducing even simple means tests for more benefits where the bar can be set fairly high would save money, and every piece of extra revenue is important in such strained times.
Ring-fencing the NHS was a mistake, it has a swollen bureaucracy that surely could have taken some of the public sector strain without damaging crucial frontline health services. Even small cuts to the extensive NHS budget could have meant less severe losses for other departments.
Perhaps defence could have been cut further. It’s a lengthy debate, so we won’t delve into it here, but could trident have been cut rather than delayed?
Is this all too soon?
Although job losses will be strung out over the next few years are they still going to prove too much for a fragile economy?
Labour seem to think that we are heading back towards recession. In the US, Ben Bernanke, who has studied the Great Depression in much depth has warned strongly against cutting too soon. Let’s hope the Government isn’t leading us towards a pro-longed period of stagnation; especially since the base-rate is currently so low, at 0.5% the Bank of England has virtually no room for manoeuvre should things turn sour.
The size of government is only being reduced back to 2007 levels though, which many would argue is not exactly a small state, so fears may have been exaggerated.
With a rise in VAT to come, and job losses starting to unfold the economy will face a stern test. There is going to be doubtless misery and many people will be inevitably made redundant.
One thing the coalition should try to do to soften the blow wherever possible is to try and reduce red-tape both to employing new people and retaining current employees. Giving the private sector this extra freedom could help absorb, if only a fraction, the public sector losses.
Now the choices have been made, time will ultimately either make or break the Spending Review proposals. How the affects of the cuts unfold will almost certainly determine the outcome of the next general election, let’s hope for the nation’s sake that Osborne’s economic gamble pays off.