Sunday, 24 October 2010

Spending Review - we might all be missing the real problems

There were a variety of possible titles for this post – “Cuts? What Cuts?” was the most obvious although such language perhaps is less than politic. I also considered a more subtle approach – “Spending review shock as Osborne protects public spending at the expense of economic growth”. But instead I’ve plumped for what you’ve got – something of a cop out, I know, but still making the key point. Which plenty of observers, reporters and pundits have made (other than those swept away in the “biggest cuts in the history of the planet” spin that’s coming from both sides in the debate) – that these are cuts to projected spending not cuts to actual spending. Here’s an example:

In essence, all that George Osborne did on Wednesday was to confirm the current expenditure totals he set out in his Emergency Budget in June. To appeal to Britain's middle-classes, the Chancellor claimed that by 2014-15, the UK's welfare bill will rise by £7bn less than expected. Note, we are talking about a slower rate of increase, not a cut. Combining that notional gain with "savings" of £3.5bn elsewhere allowed Osborne to say his squeeze will be less severe than announced in June, with departmental expenditure £10.3bn higher than previously forecast by 2014-15.

And the settlement – the retrenchment from Government spending 47% of everything we earn to it spending a mere 41% of everything we earn – is little different from the similar retrenchments in 1980-84 and 1993-96. In the latter case there was also a net reduction is public sector employment of over 200,000 – something we seemed to manage reasonably well (if my memory serves).

In truth the central message of this settlement is partly that retrenchment (which some, of course, think will derail the economy while others feel is too small) but also a significant shift of resources within the public sector itself. The CSR redirects funding away from welfare and regulatory control activities towards the dominant public services – schools, healthcare and care for the elderly. If this had been a Labour settlement – and it could well have been – then the message would have been about “investing” in vital services during difficult times. Instead we have a kind of faux hairshirtedness – a deficit machismo to describe what is, in reality, probably the smallest reductions the Government could get away with without threatening the capacity of the private sector to deliver growth.

In very few areas – local government administration might be one and the organisation of Whitehall another – do the scale of projected reductions signal the need to rethink the entire operation. And in areas crying out for major reform such as education and health there is a net increase in frontline spending that provides little incentive for real change.

None of this will soften the pill for all those – in the public sector and in their contracting agencies – who face redundancy as the largess of the Brown years is wound back. Indeed, it is this “funny money”, the short-term streams of funding targeted at specific “problems” (some very real like the persistence of welfare dependency in inner cities but others driven more by political considerations) where much of the pain will be felt when it comes to job losses. I fear that, in some areas, local councils will act to protect “vital services” – such as rooms full of policy officers, teams of diversity advisors and cabinet support teams – at the expense of those helping young people get jobs, helping the homeless find a flat and giving society’s flotsam and jetsam a bit of a chance.

We should – since the Spending Review will not massively affect most of us – look instead to a couple of other things that should be worrying us. Firstly, there’s the domestic concern of inflation – the biggest impact on how well off we feel comes from a combination of rising taxes and inflation shrinking our real income.

Yet, as the average voter focuses on the cuts in front of him and not without reason - a meteor is hurtling towards him from behind. Since the recession started, there has been an increasingly large gulf between what politicians are focusing on (public spending and taxes) and what real voters are most worried about (low wages and rising inflation).

The real financial burdens on everyday people might do more to undermine support for the government than any cuts programme - yet those burdens are going almost entirely ignored by ministers, who are unable to recognise pain which is not inflicted by the government.

And it’s not just the Government overlooking inflation – some of us think that behind the seemingly benign talk of “quantitative easing” and the less benign (and – evidence shows – dangerous) nonsense about the deflation we haven’t had, lies a view that a year of so of significantly above trend inflation will do wonders for the debt problems. At the expense of savers.

The second worry is that the world is lurching back towards managed trade – the dreadful protectionist model that helped create the “Great depression”. So far the urgings of the USA and others to enter a new protectionist chapter in trade has been kept at bay:

Meanwhile, a US plan to set firm trade caps, as a way of rebalancing the global economy, was also shot down by China, Japan, Russia, India and Germany. While the G20 agreed to reduce “excessive” trade imbalances, no firm targets were set. Instead, the final statement from the G20 simply said that “indicative guidelines” would be agreed at a later stage, “recognising the need to take into account national or regional circumstances”.

But expect it to return and to damage both international relations and the world economy. In many ways the retrenchment of last week’s Spending Review – welcome though it is – remains something of a sideshow beside the damage that high taxes, inflation and protectionism will do to the health, wealth and well-being of ordinary people.


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