Things can only get worse

12 Sep 08
TONY TRAVERS | It is a measure of the Conservatives’ confidence that shadow chancellor George Osborne has let it be known that he is now considering public expenditure cuts.

It is a measure of the Conservatives’ confidence that shadow chancellor George Osborne has let it be known that he is now considering public expenditure cuts.

In comments made by his aides to the national press earlier this week, it was even stated that he might cut expenditure in 2010/11 — the first year of power if the Tories win a late 2009 or 2010 general election.

In an interview, Osborne described his likely inheritance as a ‘complete economic mess’, and this is probably a reasonable assessment. We will not know the government’s latest guesstimates for growth, inflation, tax yields and borrowing until Chancellor Alistair Darling publishes his Pre-Budget Report later in the year.

But forecasts are unlikely to be good. Growth will scrape along at around 1% in 2008 and 2009, with all-important Retail Price Index inflation heading towards 6% before a gradual decline. Tax yields will be below previous projections, while public sector borrowing will easily exceed the forecast in this year’s Budget.

So much for ‘abolishing boom and bust’. Prime Minister Gordon Brown’s unwise declaration about his ability to override the normal operation of global capitalism has come back to haunt him and his doomed Treasury successors. The current economic downturn is fascinatingly different to those that occurred in the 1970s, 1980s and 1990s: at every moment, there is the possibility that something really, really bad will happen, plunging the economy into a 1930s-style recession.

World stock markets bounced at the start of the week on the news that the US government had, in effect, decided to take over housing lenders Fannie Mae and Freddie Mac. But this news carries two contradictory messages. On the one hand, the US authorities have been active in managing their economy’s problems. By comparison, the British government has shown little such initiative. But on the other hand, the need for a lame-duck Republican president to resort to nationalisation suggests the threat of a much graver situation remains.

Osborne has committed himself to shaking up Labour’s spending rules and to creating an independent panel to oversee the government’s behaviour in relation to them. The Private Finance Initiative and other financing deals will be reviewed, with a powerful hint that the PFI will be scaled back. ‘Green’ taxes have been damaged, according to Osborne, by the present government’s willingness to use them as ‘stealth taxes’. Here, the implication is that environmental taxation might be ringfenced for explicit ‘green’ purposes.

He also admitted: ‘[The public finances] are going to cast a long shadow over British politics for the coming years.’ This is a statement of the all-too-obvious. The Blair–Brown spending splurge will have been unlike anything since the Heath-Barber boom of the early 1970s. As before, the massive ‘boom’ will be followed by a painful ‘bust’.

In 2010/11, health, education and international development would be spared any Conservative cuts. Other spheres of public spending should presumably start preparing for a traditional round of ‘cuts’ in the first weeks of a Cameron government. If this happened, it would closely resemble Margaret Thatcher’s early months in power during the summer of 1979. To make the parallels even closer, a ‘bonfire of controls’ would surely be a priority for new ministers, especially given Labour’s predilection for micro-management.

But perhaps the Conservatives won’t win, despite their opinion poll standing. Or they might need Liberal Democrat parliamentary support. However, Osborne’s LibDem opposite number, Vince Cable, has said he would reduce public expenditure by £20bn to fund tax cuts for lower earners. So, in reality, the main opposition parties are locked in a downward auction in relation to state spending.

Does Alistair Darling have any room for manoeuvre? He and the prime minister have already had to put additional IOUs in their empty piggy bank to pay for the 10p tax bail-out, cash for Northern Rock, the climbdown on capital gains tax and, most recently, a stamp duty holiday for lower-value properties. With more largesse expected in the Pre-Budget Report, Britain is now a country with a rolling government budget process.

The chancellor might just about be able to honour his 2007 Comprehensive Spending Review plans for the period up to 2010–11, but he will have to borrow ever more to do so. As preparations are made for the 2009 spending review, Darling will be under inescapable pressure to hold down Labour’s spending plans for the years from 2011/12 onwards.

If the UK economy recovered to grow by about 2% a year by 2010/11, demands to cut back borrowing would still require public spending to fall as a proportion of gross domestic product for a number of years thereafter.

Osborne and Cable have simply dared to say what Darling must already know. Even the NHS and schools will not be immune. It is going to be a long haul.

Did you enjoy this article?