The FT throws a grenade at Osborne (and Balls)

Yesterday’s lead article on the front page of the Financial Times was positively incendiary (Osborne faces doubling austerity cuts to £48 billion a year to hit targets“). David Cameron wrote last month that most of the cuts in the austerity programme had been achieved, with ‘only’ £25 billion a year still to be removed from budgets, “but FT analysis has found that less than half the required reduction has been made.”

“The level of cuts is nearly twice the £25 billion estimate because that figure does not include planned cuts for two years out of nine – 2015-16 and 2018-19 – and takes no account of the effect on departmental spending of rising numbers of pensioners and increases in pensions payments. The Institute of Fiscal Studies last month criticised Mr Cameron for omitting the first and last year of the next parliament when calculating the size of the cuts to be made.”

The FT estimates that if the ‘ring-fence’ of health, education and overseas aid remains then the ‘non-protected departments’ face real cuts of 33% against the 21% cuts they faced between 2009-10 and 2014-15.

“Even if Mr Osborne cuts welfare payments by a further £12 billion a year, as he promised in January, this will not be enough to prevent deeper cuts during the next parliament. In the March budget documents, data show that after taking account of inflation, the coalition cut annual day to day public expenditure by £25 billion between 2009-10 and 2014-15. However, a further £48 billion must be removed from the current £312 billion spent in all department to reach a target of £264 billion by 2018-19.”

In his first budget Osborne forecast that he would ‘balance the books’ (i.e. the annual current account) by 2015. However, when economic growth failed to materialise at the expected level, he let his deficit reduction timetable slip. He is now looking to achieve a surplus on the current account by 2018-19.

The FT Financial Editor wrote that

“The longer period stems from progressively weaker forecasts on the country’s economic health from the OBR…There are other factors – George Osborne, chancellor, has imposed a tougher deficit target, seeking to run an absolute surplus in the public finances by 2018-19, and although employment has risen, many of the jobs created have been low paid, hitting income tax revenues.”

The government cut £18 billion from “public sector gross investment”. In masterly understatement he says that “These deep reductions in capital spending were probably damaging to growth, but easier to implement because they did not affect services directly.”

Osborne has spoken of cutting the welfare budget in the next parliament by £12 billion a year, but so far he has only identified £3.2 billion savings by freezing non-pensioner benefits for the first two years after the General Election.

“Short of an economic miracle in which Britain embarks on sustainably faster economic growth than expected for many years, whichever party wins the next election will have to implement these spending cuts or something similar.

If government wants to run a surplus in 2018-19 and wants to reduce the size of the public spending cuts to come from non-protected departments, it will have to raise taxes, remove the protection for health, education and overseas aid or cut the social security bill again.”

It could, of course, combine all three. Neither the Treasury nor the OBR has responded to the FT figures thus far.

This situation underlines the disastrous consequences of the coalition government’s austerity programme. For all the new jobs that have been created tax revenue is not rising because of the domination of low wage and precarious employment, including ‘self-employment’ and the ubiquitous zero hours contracts. Even the CBI is worried about the impact on the economy of the decline in the value of earnings, though it has the cheek of old Nick in asking the government to increase welfare spending rather than suggesting to its members that they take the radical step of increasing wages!1

Whilst this may be uncomfortable reading for Osborne, his ever resourceful self will know doubt try and obfuscate the facts, as academics might say. Yet it will also make uncomfortable reading for Mr Balls as well. The FT suggests that whoever ends up in government “will either have to loosen the deficit target, increase taxes or impose more cuts to public services, deeper than those experienced since 2010.”

The FT, of course, ignores the alternative of driving up receipts by way of significantly increasing the minimum wage, cutting socially useless spending like Trident, and seriously tackling tax avoidance and evasion. The government should be increasing staff at the HMRC rather than cutting jobs.

The FT research shows the stupidity of Balls in committing to sticking to Tory spending limits and to “matching” their promise to ‘balance the books’. There is no way under current circumstances that this can be done by 2018-19 without cuts so deep that even the FT suggests that they may be “beyond what the British people can bear”.

Ironically, despite the lead article, the FT decided to produce an Editorial on “The sorry state of Ed Miliband’s leadership” rather than the sorry state of George Osborne’s chancellorship. It has a point though when it says:

“Ed Balls, his shadow chancellor, has chosen a less ambitious goal for deficit reduction than the Conservatives, but provides next to no detail about how he would hit that target. As well as being responsible, this represents a missed opportunity: the Tories plans are so tight that they may require spending cuts beyond what the British people can bear. Labour cannot speak effectively, however, if it has no plans of its own.”

The real problem, however, contrary to the view of the FT is that Balls and Miliband have not broken from the ‘free market’ economics of New Labour. They have failed to successfully challenge the fairy tale of the coalition that the country was in a mess in 2010 because of Labour’s profligacy in public sector spending, ignoring the fact that there was a global crisis of capitalism. For Labour to challenge this would mean owning up to their real crime of letting private sector debt rip and instituting a regime of ‘light-touch regulation’.

Their failure to galvanise electoral support is in part because their recipe for ‘making the market work in the interests of all’ is nonsense and is seen as such. Even when a majority of Tory voters support the re-nationalisation of the railways, the two Eds cannot even bring themselves to agree to bring back the train operating companies into the public sector at the end of the franchises. They cannot bring themselves to support Councils building new Council housing with central government grant, which would address the housing crisis and create jobs, because of Balls support for Tory spending limits.

Despite the talk of ‘paying down the debt’ we know that the coalition has increased the national debt by more than £500 billion. It’s economic fairytale is unravelling. Debt in September was £100 billion higher than a year earlier at £1.45 trillion. Socially useful and productive activity is necessary to drive up government receipts, which crashed as a result of the recession. Austerity is driving up spending despite the cuts. The longer it goes on the more damage will be done.

Martin Wicks

November 11th 2014

1The CBI estimates that an average couple with two children saw their income fall by £2,132 a year in real terms between 2009-10 and 2012-13.

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