Monday, 13 September 2010

Cutting to the Truth…

Nick Clegg, who continued to grow in stature as Deputy Prime Minister, sought last week to offer reassurance to those worried about the forthcoming spending review and the likely cuts in public spending. Indeed there was more than a hint that the cuts would be nowhere near as severe or radical as those on the Left fear and those on the Right hope.

The media coverage of the Comprehensive Spending Review (CSR) and its outcomes has been nothing short of lamentable. The received wisdom seems to be that there will be a 25% across-the-board next year with more cuts in the years to come. This was probably predicated on the leaked announcement earlier in the summer that Government departments had been tasked with looking at a range of cuts from 25-40%.

No one is seriously suggesting a 25% cut in 2011-12, least of all George Osborne. The cuts are due to take place across a four-year timescale with the aim of achieving a 25% reduction at the end of 2014-15 i.e.: by the next election.

Now, there is more than one way to skin a cat and if you have to reduce from 100 to 80 in four steps, there are a number of ways to achieve this. You could cut straight to 80 in step 1 and then stay at that level, you could cut from 100 to 95 to 90 to 85 and finally 80 which is another valid approach or you could cut from 100 to 90 to 80 and then stay at 80 in the last two steps and so on.

There are sound practical and political reasons why the first two (and seemingly most obvious options) won’t work. An immediate across-the-board 25% cut would be a severe shock to a fragile economy. Tens of thousands of jobs would be lost in the public sector with the resulting impact on consumer spending, supporting industries and the cutting of Contracts would severely harm elements in the private sector. Whether you like the public sector or not (and many on the Right clearly don’t), it has a symbiotic relationship with the rest of the economy. If the public sector sneezes, the private sector suffers too.

The risk of a severe slowdown and possible double-dip recession would be enhanced with all that would flow from it and I can’t see the rationale for that.

The more gradual approach is superficially attractive – it would certainly allow the economy more time to absorb the impact and mitigate some of the worse effects but there’s a political problem. The Coalition faces an election in May 2015 – I suspect David Cameron and Nick Clegg would like to go into the election on an optimistic with the cuts done, the deficit under control, the economy growing and even some room for the odd giveaway (perhaps a reduction in VAT back to 17.5%). If the cuts are still happening in 2014-15, it won’t augur well for the Coalition or its political prospects.

What we are likely to see then is a route somewhere between the two with the cuts front-loaded to the next two years and then easing thereafter. Will it be enough to prevent a double-dip recession ? Opinion is divided but I’m in the bullish camp and while growth will doubtless slow, talk of a second recession (unless some dramatic external event intervenes) looks overdone. Jobs will be lost and possibly many thousand in the public sector and there will be many unpleasant months ahead but over time it’s possible to argue that improved growth will create new job opportunities.

Politically, the next 12 months are going to be very tough for the Coalition parties and last Thursday’s elections in Exeter and Norwich showed just how bad the political impact might be but in the longer term I’m hopeful, even confident, that the improved economy will swing voters away from the narrow obstructionism and negativity of Labour and ensure BOTH Coalition parties do well in the 2015 General Election.

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