Monday, May 24, 2010

George Osborne's Spending Cuts

Osborne unveiled his spending cuts by claiming that unless he cut, debt repayments would "spiral out of control".

As it happens, the deficit is falling. Contrary to the claims made by Osborne and Laws that the Labour government's projections were too optimistic, it turns out that Darling was being too pessimistic: last year's deficit turned out to be £156 bn undershooting Darling's projection of £170bn. (Laws owes Darling a public apology). Given that many Tory forecasters were claiming that the deficit last year would hit £200bn, they must be scratching their heads wondering how Darling managed to "cut" the deficit so sharply without actually cutting.

Simples. You just hold steady, reassure consumers, and economic activity lifts, raising tax receipts sharply and cutting support you need to give those unemployed.

Labour's argument was always that you should only cut govt spending when the private sector is going full-pelt (which is what Gord did in the six years to 2002 and the recession). That way, not only does the economy not feel the cuts, the cuts dampen the chances of runaway inflation.

But for ideological reasons, the Tories seem to be chomping at the bit to make cuts right now, regardless of the state of the economy.

From what has been announced, two sectors will be really hit - local government will expecience a 7.4% cut in grants, which they will need to make up either by council tax rises or cuts.

The other sector to be hit is the private sector, as Stephanie Flanders points out in her blog. They will be bearing 27% of all the cuts announced today by Laws and Osborne. They are getting screwed in multiple ways, from having contracts cancelled to taxi drivers losing business. All of this will impact those sectors' revenue, profits and the tax receipts the govt gets from them.

A lot of ideological anti-state people simply don't realise how intertwined the private sector is with the state. This is not 1979 when the state directly employed everyone who did anything with public money. The Labour government tended to hire private contractors whenever they needed stuff done.

Therefore it shouldn't surprise that any public spending cuts will hurt the private sector most. And this is just the first round.

If the Osborne-Laws cuts damage the private sector badly, watch for tax receipts to nose-dive and the deficit to get bigger as a result of these cuts.


Mil said...

Lovely post. Have linked to and quoted from. It's frightening how wrong and ideological government can be - even today, after everything that's happened.

I always fear the oxymoron of right-wing "radicals".

Gideon Follower said...

Nice post. I think you're right to point out that it isn't necessary to start cutting /now/. And it isn't even clear if we should atart cutting /at all/!

I've been having lots of fun finding out George Osborne Will Cut Next over at the No Shock Doctrine for Britain site.