Friday, July 02, 2010

Mad Max Budget - but is he serious?


After a stunned silence after the most draconian budget in modern times, the country is waking up to what the new age of public austerity will actually mean.  Commentators paint a picture of a Mad Max dystopia - a country plunged into depression and decay.  Crumbling schools, empty swimming pools, leisure centres boarded up.  Feral children running riot as police numbers are cut.   Potholes in the road filled with rubbish uncollected.   A million public sector workers sacked;  families evicted after losing housing benefits; strikes and civil unrest returning to the streets of Britain after nearly thirty years.  Yes, it’s pretty grim. 

    So grim in fact that people are beginning to wonder if  George Osborne really means it.  Was the budget just a ploy to sound tough?   Will it all be quietly laid to rest before the comprehensive spending review in the autumn spells out exactly where the cuts will fall?   It’s actually very difficult to know how you go about cutting departmental spending by 25% in real terms.  Do you throw a quarter of prisoners out of jail?  Close a quarter of all libraries, museums, schools? You can't just sack social workers when there are statutory responsibilities like child protection.    Health and overseas aid are the only departments given a clear exemption from the cuts, but even here there will be cost implications of the increase in VAT to 20%.

    And what about Scotland?  If the state is being rolled back in a manner unseen since 1919, what happens in a land where public spending is just about the only thing that's kept the economy going so poor is our entrepreneurial drive?  Well, whisper it, but Scotland might actually be rather less seriously hit than might at first appear.  A third of the Scottish bloc is health spending, and if that’s ring fenced, say some analysts, then thanks to the magic of the Barnett Formula,other areas will actually be cut less.  Professor David Bell of Stirling University says that the reduction be 17% over four years, rather than 25%.  Better not tell Tory backbenchers, though.   And there are other areas where Scotland may get off lightly.  The Scottish finance secretary, John Swinney, is not bound by the freeze on public sector pay for Scotland’s 600,000 state workers. Housing benefit is to be capped at £400 a week, but in Scotland where rents are lower and very few claim that much,  we may see fewer families on the streets. 

   But there are still issues to be addressed.  The Tories aren't all wrong about the benefits culture.   Can it really be true - you ask -  that families were getting more than £19,000 a year in housing benefit, not far short of the median female wage?   Yes it is - amore than 5,000 of them , according to the Department of Work and Pensions.  In Hackney, some were getting £1,000 a week.   Housing benefit is a £21bn subsidy, much of which goes straight into the pockets of all those buy-to-let landlords who have been exempted from the higher rate of CGT.   How did that ever happen?  

   And how did it happen that families earning £40,000 were receiving  tax credits?  As a public education exercise, the budget has been rather effective, both in identifying areas in which state spending has got out of control and in spelling out  the overall financial predicament facing the UK.  For Osborne made clear that even with these unprecedented cuts in spending, after the VAT increase and all the departmental axe work, the national debt will still rise to £1.3trillion by 2013 and the debt payments on that will still rise to £70billion a year.  This was always going to be unsustainable, because with that level of debt, governments lose control and become the playthings of international financiers.   It takes only a wave of speculation, an increase in interest rates, and a deficit drama becomes a Greek sovereign debt crisis.  Labour may attack the deflationary aspects of this budget - that it will increase unemployment and depress growth - but even they have to accept that a retrenchment exercise of something like this scale was always going to be necessary.  They’re just thankful they didn’t have to do it. 

  Of course, the Tories have protected their own by opting for regressive taxation like VAT instead of progressive taxation like income tax.  The Liberal Democrats won a feeble £150 safety net for the every very poor,  but that won’t stop this being a budget that brings hardship to millions. However, this also makes it politically very dangerous, reckless even for the Conservatives.  David Cameron doesn’t want to be cast as a heartless thug prepared to penalise the vulnerable and destroy the fabric of society.  Think of all the forthcoming TV documentaries about the ‘new poor’, the collapse of social services, rotting regions.  

   The coalition with the Liberal Democrats could be the first casualty as Libdem councillors in hard hit urban areas revolt.  If the coalition falls apart after the Scottish elections in May 201 - just as unemployment is reaching three million and the nation is beset by strikes -  the Tories could be destroyed in any early general election.  The last time this happened was in 1974 when the Tory prime minister, Edward Heath, went to the country during a comparable debt crisis asking “Who runs the country”.  He lost.   We live in an entitlement culture and the voters can be harsh on politicians who tell them uncomfortable truths

  Perhaps this is why we are being told that there is an element of discretion in the cuts programme. The Chancellor made clear yesterday that if more can be saved from the welfare bill, there might be less need to axe other departments. Public sector unions are likely to be told that if they accept cuts in future pension entitlement they can save jobs now.  But cutting welfare spending is notoriously difficult - remember how the new Labour government was plunged into crisis over the abolition of lone parent benefit in 1998.  Lifting the guarantee on health spending could take us back to the days when patients waiting on trolleys.   The forthcoming comprehensive spending review has turned into a game of chicken between the Mad Max Chancellor and public opinion.  How much will we take?  Will he go the whole way?  Is he serious?  Or could there be an epic 70’s style U-turn, as the Tory government reopens the spending taps to forestall a deepening economic depression and a wave of social unrest.  Watch this space. 


1 comment:

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