sam boyd | politics

Austerity till 2017 – and that’s the best-case scenario

with one comment

5 December 2011

So the shifting sands of last Tuesday’s autumn statement have had nearly a week to settle. We now know that the government will miss its self-imposed target to eliminate the structural budget deficit by 2015, Osborne will borrow £158bn more than originally planned, and austerity will be extended two years beyond the next election to 2017. The Tories, and probably the Liberal Democrats, will go into 2015 promising not balanced books and tasty tax cuts, but £30bn of further spending cuts. This was not the path intended.

Osborne did, however, pledge to bring forward some major infrastructure projects totaling £5bn, and confirmed the £1bn youth contract scheme. He will hope that this ‘Plan A+’ will do something about our stagnation in productivity and soaring unemployment.

The cost of these measures will be met predominantly by squeezing tax credits even further, and by capping public sector pay rises by 1% for the next two years. 700,000 public sector workers will lose their jobs over the next five years, up from the 400,000 previously expected. Another £20bn is hoped to be “unlocked” from pension funds.

The IFS has provided a useful graph showing the impact of these changes across society:

Given government rhetoric that those with the “broadest shoulders should bear the greatest burden”, one might have expected that graph to be the exact reverse. Instead, the Resolution Foundation has shown that the poorest 30% will pay for as much as half of new measures. 100,000 more children will be pushed below the poverty line.

Meanwhile, the IFS expect that real incomes will be no higher in 2015 than they were in 2002, an unprecedented decade-long stagnation. IFS director Paul Johnson added:

“We estimate that in the period 2009-10 to 2012-13 real median household incomes will drop by a whopping 7.4% – another record matched only by the falls seen between 1974 and 1977”

In broad economic terms, however, the government’s strategy remains largely unchanged. £5bn on infrastructure projects over three years is a minor development when you consider the government spends around £700bn annually. This was not a significant ‘stimulus’ for which many on the left have been calling. The paradoxical ideal of “expansionary fiscal contraction” remains at the core of the government’s agenda. It worked in Canada, we’re told. Yet, as pointed out by David Blanchflower, Canada’s neighbour in the 1990s was a booming US – handy for an export led recovery twinned with fiscal tightening. The same cannot be said for the UK, given our largest export market – Europe – is suffering from a protracted debt crisis of epic proportions.

Politically, the ramifications of the autumn statement are likely to be major. The Tories bet their house on austerity balancing the books by the next general election. So did the Lib Dems. It isn’t going to happen. Cameron and Osborne must now hope that the electorate swallow their message that we are on the right track, global events have blown us off course, and that turning back now would be disastrous.

It will be a difficult message to sell, but much will depend on Labour’s ability to overcome its enduring lack of economic credibility amongst voters. Indeed, Labour seems be suffering rather than gaining from economic turmoil – yesterday’s Sunday Times poll showed the Tories with a two point lead. Even if this was an anomaly, voters still consistently favour the Cameron/Tories combo over Miliband/Labour in a forced choice question.

Things will become far more difficult for the government, however, if Britain loses its prized triple-A credit rating, and can no longer be claimed a “safe haven”. This is no longer a fanciful prospect. As a Times leader asks today,

“What, then, would the Conservative Party say was the dividend from its policy? Would it even be able to say that its determination had kept Britain safe in the storm? And if it did not say that, what else would it say?”

Of course, all of this depends on the crisis in the eurozone being resolved pronto – hardly a given. What will worry the government most, then, is that even their best-case scenario appears this desperately gloomy.

Advertisements

Written by Sam Boyd

December 5, 2011 at 4:46 pm

One Response

Subscribe to comments with RSS.

  1. Scary stuff!
    Thanks for posting
    Rob.

    wobsy

    December 5, 2011 at 4:48 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: