The true scale of the cuts
George Trefgarne 12:19pm
George Osborne likes to spend his weekends at Dorneywood, the chancellor’s
official residence near Slough, but I doubt this one will be particularly enjoyable. He will be burning the midnight oil as he prepares next Wednesday’s spending review. No doubt he
will also be taking calls from ministerial colleagues, muttering dark threats about aircraft carriers, the arts, sport, the roads budget, overseas consulates – you name it. And just when the
numbers all add up he will probably have to start all over again after discovering that No10 has promised to save some wind turbines because Steve Hilton bumped into somebody at a drinks
party.
Meanwhile, we can expect a great caterwauling to be got up in the press as various interest groups, retired admirals, Mumsnet, “the disabled,” etc, wave their bloody stumps,
pleading for exemption from “the cuts”. My advice is to take a deep breath and to take it all with a generous pinch of salt. I am committing heresy here, but in my opinion both the
deficit and the cuts, though serious, are exaggerated, not least by the Government itself. For in the absence of any really compelling political credo from either the Conservatives or Liberal
Democrats, controlling the deficit has become a sort of pseudo-ideology holding this administration together. Something must be done, and this is something.
Welcome support for my admittedly minority point of view comes today from economist Tim Morgan, in a brilliantly contrarian paper for the Centre for Policy Studies. He demonstrates that so vast is the scale of Government spending
following 13 years of profligacy that, relatively speaking, the proposed spending cuts are actually quite modest overall. They merely involve reversing, over five years, a comparatively small part
of the enormous increases which took place in the previous decade.
How so? Well, the impact of inflation means that a pound earmarked for saving in five years time is actually worth less than a pound saved now. Take that into account, says Mr Morgan, and the real
impact of the headline £87 billion of cuts will be simply to take spending back to where it was in 2008/9, or £671 billion in today’s money. This year, by the way, the
Treasury is planning on eating its way through £697 billion, almost exactly double what it consumed, in cash terms, ten years ago.
So why such a fuss? There are two reasons. First, very simply, the public services have been used to running at their own bespoke inflation rate which is even higher than the one inflicted on the
rest of us. Health and defence have always risen in cost rapidly since the dawn of time, but under Labour everything from benefits to phone calls by civil servants went up much faster than they
should have done. Spending other people’s money is such fun, after all.
The second reason there is so much wailing and gnashing of teeth is the anatomy of the cuts. Before the election, David Cameron and Mr Osborne decided to ringfence both healthcare and overseas aid
from any cuts. To be clear, that does not mean their budgets are frozen or restricted to rising in-line with high street prices. Oh no, they are being allowed to gallop along at
Labour’s same old pace. Add to that the twin facts that interest payments on the ballooning national debt are expected to more than double by 2015 and that Ian Duncan Smith’s welfare
reforms are apparently incredibly expensive, then logic dictates that the cuts are actually being concentrated on a surprisingly narrow group of squealing departments.
The anatomy of the cuts, as opposed to their overall scope, was a political choice taken by the leadership of the Conservative party for their own reasons in 2008. This strategy was further
enshrined by the Coalition agreement, which was negotiated just as Athens went up in flames in the face of a very serious fiscal crisis gripping the euro zone. The Governor of the Bank of England
even rang Nick Clegg to reinforce the urgency of controlling public spending. It does not take a genius to work out that, in that heated atmosphere, one of the first things the Lib Dems agreed to
was ring-fencing supposedly “nice” things like health and overseas aid, while axing nasty, smelly Tory things like roads and Tornado squadrons.
Controlling government spending, as Morgan says, is surely the right thing to as the alternative would be to take a grave risk with the economy. But let us not get too carried away. The Government
owns something like £50 billion of shares in the banking system and can furthermore privatise agencies like the Royal Mint and the Tote and sell off some of its large property portfolio.
Assuming they do those things, the national debt will come down. Furthermore, thanks to Quantitative Easing, about a quarter of the national debt is actually owned by the Bank of England, which
effectively means the Government is paying interest to itself. For complicated reasons, that reassuring number does not feature in the public accounts.
No, the problem with the fiscal consolidation is not so much its scale, but its design. It is being accompanied by a so-called “progressive” redistribution (don’t you hate that word, by the way?), whereby tax rises and benefit cuts and even rises in university fees fall disproportionately, on the middle class. Leaving aside its iniquity, this progressive agenda has nullified the sort of supply side reforms and reductions in income tax rates which accompanied Margaret Thatcher’s cuts. This time around, more and more people are being dragged in to the top rate of tax and the Arts budget is being sacrificed for overseas aid, which is plainly ludicrous. Unless I am missing something, I do not see how this flawed design can do anything other than leave the Tories stuck at 36 percent of the vote, as they were at the general election. The correct verdict on Osbornism so far is good economics, not so good politics.
Previous
Commentator
October 15th, 2010 12:56pm Report this commentThe modernisers' strategy was always to test to destruction the theory that they could screw their core vote because it had nowhere else to go. Hence record numbers abstained or voted for UKIP. Labour lavished money on its core vote: hence it was not swept away in May and is at 40% in the polls despite having laid waste the economy for the foreseeable future.
Osborne's policies are not even good economics. Once you have impoverished the middle classes with benefit withdrawal (i.e. stealth taxes), high taxes, tuition fees (more stealth taxes), inflation (the biggest stealth tax of all), high housing costs and pitiful savings rates, who else is going to foot the bill for the £1.3 trillion of debt which the UK will have racked up by 2015 (excluding what is off balance sheet)? It won't be the City because a large part of it is moving to Switzerland, Hong Kong and Singapore.
Nick
October 15th, 2010 1:00pm Report this commentThe Government owns something like £50 billion of shares in the banking system and can furthermore privatise agencies like the Royal Mint and the Tote and sell off some of its large property portfolio. Assuming they do those things, the national debt will come down.
===============
Complete horse shit.
The deficit is 160 billion a year.
Selling 50 billion of assets raises 50 billion which means the deficit is now 110 billion a year. That's the rate at which debt increases. So selling off 50 billion will not reduce debt one iota, its still rising.
Hazarding a guess, George can't tell the difference between his arse and his elbow, as well as the difference between a deficit and government debt.
TrevorsDen
October 15th, 2010 1:06pm Report this commentLeaving aside its iniquity?
Hmmm ... So someone with a bright child who goes to university but who is poor should stump up a disproportionate share of his/her meagre income whilst someone paying higher tax pays disproportionately less. ??
There is an easy way out for Osborne, I'm surprised no one has thought of it - simply do not worry about where the money is going to come from. This is the Labour policy. Just spend and bugger it.
Nick
October 15th, 2010 1:25pm Report this commentLets have a debt tax to pay for the accumulateed debt, on and off the books, plus an annual statement with your pro-rata share of the total debt.
Lets see Labour talk their way out of that.
GBH
October 15th, 2010 1:31pm Report this commentI am pondering how a further bout of QE, which the PM and the CX are feeling comfortable about, could sit with deficit reduction at the same time. Seems triangulation a bit too far....
PHIL JOHNSTON
October 15th, 2010 1:54pm Report this commentBALANCING THE BUDGET WILL TAKE CUTS IN THE ARMED FORCES AND THIS WORRIES THE USA. IT WOULDN'T BE BECAUSE MOST OF OUR SPENDING ON FORCES GOES TO PAY THE AMERICAN BUDGET DEFICIT?
John Moss
October 15th, 2010 2:19pm Report this commentI always thought "progressive" politics meant:
Progressively higher spending, funded by progressively higher taxes, which led to progressively lower growth, so created progressively lower tax receipts and progressively higher borrowing, which caused progressively higher interest rates which led to an abrupt stop and a recession!
It is also a myth that we have a "progressive" tax system. Once benefits are included, the marginal deduction rate for househods in the UK starts at about 98% for the first £1 earned, then falls to 31% for those paying basic rate tax and NI and receiving no tax credit income. Only when you earn top rate tax and beyond, do you start to pay more.
The only truly progressive system is a flat tax rate above an amount of free pay. If you set the free pay figure at £10,000 then charge 50% above that, you pay no tax at £10,000, 0.0049995% at £10,001 and 45% at £100,000. You only actualy hit 50% at infinite pay, but the percentage of your income which you lose to tax rises "progressively".
lescam
October 15th, 2010 2:36pm Report this commentAt the rate Osborne and co. are robbing the middle class, there will only be two classes left in the UK before long; the very poor, and the very rich. The middle classes will have become the new poor, in addition to the existing poor.
Just reading about ringfencing overseas aid, makes my blood boil. Couldn't give a hoot about the arts budget, and I concede the health budget is important and should possibly be ring fenced, but OVERSEAS AID? The idea of keeping this is an obscenity. And it has nothing to do with the Libs, it was planned long before the election.
OVERSEAS AID SHOULD BE CANCELLED, FORGOTTEN, BURIED FOR EVER. Sod it.
Commentator
October 15th, 2010 2:43pm Report this commentTrevorsDen, you seem to think that your second paragraph is some sort of knockdown argument. In fact it's garbage. Low earners are (heavily) subsidised by high earners through the tax system, not the other way around. According to your mad logic, a higher earner should pay all their own healthcare costs out of taxed income because to allow them ANY benefit for the tax they have paid is a "subsidy" from someone on a low income. Hopefully your local A&E will turn you away next time you show up without a cheque book.
Mark Demmen
October 15th, 2010 3:01pm Report this commentYes, I really do hate the word 'progressive'. It's the current political euphemism for socialistic redistribution and liberal elitism.
Victor Southern
October 15th, 2010 3:34pm Report this commentNick
I suspect that George Osborne knows the difference between the deficit and the national debt at least as well as you do. I suppose his Westminster School and Oxford education left him much less well educated than you but I am sure he can comprehend these basic matters.
As you see just from this thread there is complete agreement that he has it all wrong since half of the respondents accuse him of not cutting enough and the other half want more cuts.
Bloody Bill Brock
October 15th, 2010 5:41pm Report this commentBy George (NO PUN INTENDED) I think some of you chaps are on to something. The Bankers, Tories and industrial- military-Blackwater-Babylonian Secret Society, are quite deliberately stopping the Labour Party from saving the world. Dastards.
Olaf Rye
October 15th, 2010 5:44pm Report this commentHow does the author conclude that the deficit has been exaggerated ? It is out there for all to see and the international bond markets were concerned about it and the enormous national debt. It may well be that the depth of the impending cuts have been exaggerated by some, but the deficit and the debt are most certainly not something you can explain away. It is there on the balance sheets--if only it were not and the thirteen years of Labour were merely a bad dream.
TGF UKIP
October 15th, 2010 6:20pm Report this commentWhile applauding the piece, George Trefgarne, I am amazed that you have been allowed to publish it on the Spectator website, especially when it contains such a disparaging reference to Hilton.
Signs of incipient rebellion at the house mag, eh!
Paddy
October 15th, 2010 7:40pm Report this commentWhen is Labour going to be held to account for the state they have left the country in.
I am sick of hearing them say the coalition are cutting for some 'ideological' reason.
The coalition must keep 'spelling it out' -the reasons they are having to make cuts.
The banking crisis didn't cause this mess. it was Labour's profligacy.
normanc
October 15th, 2010 7:57pm Report this commentI have to say, this piece is excellent.
I love the smell of nasty in the morning!
Jason Buckley
October 15th, 2010 11:21pm Report this commentThe sensible approach would be to shift the burden of taxation from income to property, which would help restore intergenerational fairness, flatten out future house price booms and begin to deal with the inefficiency of over £1 trillion in property equity being under utilised because pensioners are squatting in family homes.
Kram Ekosum
October 16th, 2010 12:54am Report this commentJohn Moss, presumably you are an economist..!? Please can you succinctly explain why the tax system hammers the lower middle class and rising working class so much? Is it just the sheer weight of absolute numbers in that earning bracket which makes any other strategy unworkable for successive governments?
Val Duncan
October 16th, 2010 2:20pm Report this commentand begin to deal with the inefficiency of over £1 trillion in property equity being under utilised because pensioners are squatting in family homes.
********************
Don't you dare accuse pensioners of squatting in a family home!
We have worked for more than 40 years to BUY that home... to renovate and improve THAT home.
That home is my place of security... my life's work... the place where I reared a family.
Get off your all important high-horse... you will be old one day.
kevin
October 18th, 2010 9:45pm Report this commentOsborne and his people look at the poor as something they stepped on.
maddy1
October 19th, 2010 3:09am Report this comment@Kevin
Brown has left the poor even more poorly off! "Poor" is the new BBC. buzzword, it has taken over from the economically disadvantage of nu labour.
My mate @!*#hung from near Maun, Botswana is one the noveau rich, he has 20 kilos of prime Oryx meat drying nicely, he owns four lean too properties, all bought before the American subprime market in tumbleweed blew away in 2007. Furthermore he has an ostrich egg containing the clear, odourless fluid from the left testicle of an Aadvark which he says is worth more than the combined yearly GDP. of Canada, Estonia and Wales! Compare these riches to the generation Brown has left on the Flander's Field of economic meltdown in our sink estates.
PS. He is will to trade his fluid for one supersized Mc.Slurry.
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