So George Osborne has sent his message to the world’s financial markets. His insistence that the cuts announced in yesterday’s budget were ‘unavoidable’ was based mainly on the need to reassure international investors that the UK is still a safe place to lend money to ie we are not another Greece. But is Osborne’s austerity drive really unavoidable, and secondly, is it achievable?
Most of what was announced yesterday was about trimming public spending, through the wage freeze for public sector employees and taxing consumption by an increase in VAT. No doubt this will bring some pain to many people but the real impact on public services is yet to come. So far there has only been a statement of intent to cut all government departmental budgets by 25%, bar the NHS and international aid. The full extent of where the real cuts are meant to fall awaits the outcome of a public spending review in the autumn. We are now in the position of a patient who is told to cut back on fatty food while we wait for the diagnosis of how many vital organs are going to be extracted.
There is a great deal of uncertainty even within the elite as to whether austerity is the best policy to pursue. The Financial Times has been full of articles throwing doubt on the wisdom of cutting public spending too hard at this point. Some of this has come from the normal doctrinaire keynesian suspects such as Robert Skidelsky, who believe that state spending should be staying up at this stage of the recession to boost demand, not down.
But there are others who recognise that much of what Osborne, with his Liberal free market colleagues, is doing is based on a belief in a small state rather than through any financial imperative. Matthew Parris, for example, writing in the Times urged Osborne to drop the ‘unavoidable’ tag and argues
The Chancellor should not be embarrassed to say that he wants to wield the knife regardless of the deficit’s size.
Martin Wolf’s main fear is that with all of the western world, bar the US, committed to austerity it is hard to see where the opportunities for growth can come from. This gets to the heart of the problem facing the Con-Lib coalition. Drastically cutting the deficit only makes sense as a prelude to growth in the economy. Yet nobody is clear as to where this growth is going to come from. There are no obvious sectors within the UK economy poised for massive expansion. Neither is there an obvious market for UK exports, when the euro zone, currently the UK’s biggest export market, is itself in austerity mode. So, putting it crudely, we do not have enough to sell, and nobody to sell it to even if we did.
The government’s focus on supply side economics, freeing up the labour market and reducing the tax burden on private business, only works if it leads to greater investment and higher production. There is no sign of either of those things happening in the UK.
Are the cuts achievable? Ultimately this is not an economic but a political issue. Public services are heavily dependent on people. If 25% is to be cut then this will inevitably mean around the same proportion of public sector jobs going. The CIPD economist John Philpott estimates this will lead to 725,000 jobs being lost in the public sector. Comparisons are often made with the wage cuts and job losses that the private sector has experienced over the past two years, with very little opposition.
However the difference between the private and public sectors is that, if an engineer in Sheffield loses his job, this is a tragedy for him and his family. But outside of that nobody is affected. Even if the engineer’s firm is closed down, anybody wanting to buy a widget could go elsewhere. If a doctor loses her job, the same impact is true for her family, but also anybody who depended on her services will be affected as well. The vast majority of people cannot go ‘elsewhere’ for their health provision. How the austerity programme plays out will depend on how we all respond to the drastic decline in public services the government has lined up for us.
As I have argued before, the state plays such a central role in British society because capitalism is both too anarchic and too feeble to provide the goods and services that people need without state intervention. Dismantling the state looks like a bridge too far for the new coalition.