Britain’s unkind cuts may help growth sprout

October 20, 2010

It was billed as a bloodbath, and it is. By slashing public spending by 81 billion pounds over five years, Britain’s coalition government is reversing the big increases of previous years. The plan is billed as necessary pain to secure the country’s financial future, but it is also ideological. The aim is to move from unaffordable levels of public employment and welfare to private employment and a balanced budget. The danger, however, is that the economy stalls.

The cuts to the civil service are drastic and will cause distress, even though most departments’ budgets over the life of the parliament have been reduced by a fifth, not the threatened quarter. The BBC, the foreign office, the police, even the royal family: none have been spared. The government wants services to be delivered more cheaply — which means by fewer people.

Britons know the public sector is not short of fat cats, and some fat cuts won’t be the end of the world. Nevertheless, losing half a million public sector jobs is a heavy toll. If the private sector cannot absorb these workers, total UK unemployment may rise to a very high three million.

Taking the axe to many departments has allowed the government to lift health spending and maintain the schools budget. In welfare, however, it risks looking harsh. Ending child benefit for better-off families saves 2.5 billion pounds by 2015. But most of the overall 7 billion pound fall in welfare spending hits the least well off. Though the intention is to get people to swap welfare for work, the danger is greater social division.

The big macroeconomic risk is that the cuts cause a return to recession, thereby wrecking the government’s fiscal calculations. That risk is real: house prices have not yet finished falling, and consumers are still deleveraging.

The Bank of England is likely to do its bit by cranking up the printing press and making money as cheap as possible. Nevertheless, tough years lie ahead. A country that was living far beyond its means now faces simultaneous big spending cuts and tax rises. The government will hope its decision brings clarity and a swift climb in private investment. A happy outcome is far from assured. But the decisive start is probably for the best.

One comment

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Reducing public expenditure is a mistake because it will reduce consumer demand and consequently drag the economy back into recession.

Any effect on the deficit will be largely negated by a fall in taxation revenues and rise in welfare spending.

No-one should be naive enough to believe that what the Tories are doing has anything to do with the deficit. They are driven by their hatred for the public sector and all it stands for, and Labour is reducing it’s credibility with the British people by acquiescing with it.

Posted by MartinKS | Report as abusive