Weeks after the long-awaited Comprehensive Spending Review statement, we are still all ifs and buts. There was little in it that was different to what we already knew: no new forecasts, merely confirmation of the magnitude of the squeeze the chancellor set out in his June Budget. Many of the cuts were expressed in terms of government departments and it is difficult to relate these to industries or regions. Admittedly, the radical revision to benefits led to a sharp intake of breath among some quarters of the media, as did the projected loss of 490,000 public sector jobs. Having now said the same thing twice, few will doubt George Osborne’s intentions. The questions are much more about the political will of the coalition to stick to policy when the going gets rough, and about the response of the private sector.
When the recession took hold, the authorities loosened policy on an unprecedented scale. Interest rates dropped to a 300-year low, the Bank of England pumped in £200bn of quantitative easing money to shore up the banking system and ensure a supply of credit, while then-chancellor Alistair Darling eased fiscal policy. At some point, all three will have to be reversed. Interest rates will go up and the Bank of England will sell back to the banks the assets it purchased.
The inherited problem Darling had was that fiscal policy was already loose when the recession kicked in. His predecessor ran a series of deficits when the economy was growing and the subsequent policies further weakened government finances. Without doubt, the public sector was a life support mechanism for activity as the private sector retreated, but it was only ever meant to be temporary. That the deterioration in public finances predated the recession meant the way back could be painful.
Proponents and opponents of George Osborne base their positions on assumptions and assertions rather than facts or evidence. Those who believe he is cutting too deeply, too soon nurse the benign assumption that those who lend the government money will continue to do so at the most favourable rates. But they (and a third or so of the funds come from overseas) might start to lose patience or wonder, should the UK’s debts rise to Greek proportions, if they will ever get their money back. Higher interest rates on borrowed money will lead to some combination of higher taxes, even more spending cuts or delaying the payback for the next generation, none of which makes much sense. Debt serving, already at £44bn in 2010, accounts for every penny raised by corporation tax and is, as the chancellor says, paying for yesterday, not investing in tomorrow.
But to cut now is to have faith not only that the recession is over, but that the private sector can expand further to fill the gap. Remember that, though the cuts were announced in October, they will be spread over five years. And in only one year since 1999 (the recession year of 2009) has the private sector failed to create at least 200,000 new jobs.
On past form, therefore, half a million new jobs in five years does look achievable, although the private sector will feel the pinch when the government and local councils start to retrench. But the timing might be about right. In Q3, the economy grew by a robust 0.8 percent, making the 12-month increase in GDP an above-trend 2.9 percent. With the cuts expected to reduce growth by about 0.6 percent, the risk of slipping back into negative growth seems diminished.
But the process is about more than numbers. It is hard to measure confidence or to put a figure on the political heat the coalition will feel, especially when unemployment rises and the benefits squeeze starts to bite. The first quarter of 2011 will be the first test, with the VAT rise kicking in. It will be politics rather than economics that will determine the outcome.
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