We’re all in this together, said the chancellor, in his debut Budget outing this week. We’ve all got to share the pain.
It’s become George Osborne’s signature tune – designed to distance the coalition from the ghosts of austerity eras past.
So, alongside the extra £40bn worth of deficit-busting savings, there were measures to protect the very poorest, at least for now.
Public sector employees face a two-year pay freeze and pension cuts: but the worst-off will get a little reprieve. Some of the lowest paid will be lifted out of the tax threshold.
In a skilful exercise in expectation management, the government has, so far, appeared ‘tough but fair’. Even the previously voluminous Treasury ‘Red Book’ has been cut down to half its size.
But read the small print, and it’s clear that Osborne’s spread-the-misery Budget is not as even-handed as it seems.
Cuts to corporation tax, a relatively small rise in capital gains tax – and a bank levy that looks like small change – have left the City breathing sighs of relief.
This, of course, is the point. The chancellor is gambling on a fiscal consolidation strategy that will dramatically shrink the state, and encourage the private sector to take up the slack.
As numerous economists have pointed out, it’s a high-risk route. Taking this amount of spending out of the economy could torpedo the recovery, and at a very high social and political price.
The coalition claims there is no alternative: that this is the ‘unavoidable’ Budget. And, as this weekend’s G20 summit in Toronto will confirm (see pages 14–17), there is no shortage of governments that agree.
The sovereign debt crisis has seen many European Union nations take fright. Little more than a year after signing up to a massive ‘we’re-all-in-this-together’ fiscal stimulus, the G20 nations are looking increasingly to their own backyards.
Not everyone – least of all the US – is prepared to take the austerity medicine. Critics of the fiscal hawks say that crude deficit cuts threaten to shrink export markets and depress the world economy still further.
But for now, the UK government is basing its entire Budget – and three-year Spending Review – on precisely this model.
As 25% spending cuts kick in for non-protected departments (or, according to the Institute for Fiscal Studies, even 33% – see page 6), and the Treasury looks for still greater savings from the welfare budget, the pain will indeed be unavoidable.
But only for some.
Judy Hirst is the deputy editor of Public Finance
