The ConDem coalition government has broken two promises in its first moves on economic policy. In the election campaign the LibDems' Vince Cable repeatedly argued it would be too soon to cut government spending, given the fragility of the recovery. The Tories argued that they could find an early £6bn in spending cuts by efficiency savings alone. Instead, the government have begun with immediate cuts of £6.25bn which impact directly on services, investment and jobs. It is clear that the compound effect created by this coalition is more toxic even than its individual components.
The government has provided headline numbers for some government departments, and some pointers to specific programmes. These are shown in the graphic from the Financial Times below. The full detail of the cuts will not be made clear until the June 22 Budget.One of the most damaging decisions already taken is the announcement of a freeze on public sector hiring. The Chartered Institute for Personnel Development estimates that this could mean 50,000 job losses this year alone. Services will deteriorate rapidly as job-leavers and retirees are not replaced. Youth unemployment, already at 1 million, will increase further as a direct result.
Local authority budgets will be another of the biggest casualties, with hugely inadequate spending on housing cut even further. This would be disastrous in all the major cities which already suffer a huge shortage of decent affordable housing. Construction, especially for social housing is precisely an area where private investment has collapsed and one third of a million jobs have been lost in the sector in the course of the recession. Labour-led councils and all those who oppose the cuts should press hard against this deeply unpopular measure. The local authority housing budget is actually a significant net contributor to central government finances through council rents and asset sales. Both of these revenues should be used instead to create new, decent social housing.
Disastrously, capital spending will be cut at a time when investment is still falling, and these cuts will target transport and infrastructure spending - even flood management defences. The first two are also precisely the areas hardest hit by the investment strike in the private sector. The coalitions aim is clearly to withdraw government investment in areas where private investment is already weakest. This is the crass notion of 'crowding in' private investment by withdrawing public spending. It will only exacerbate deeply negative current trends in these key sectors of the economy.
This issue also highlight the economic damage of the overall cuts package, which will serve to widen the deficit. This is precisely what is currently occurring in Greece and Ireland - and of course when Thatcher did this in the 1980s the deficit rose as the economy and tax revenues slumped.However, what has been introduced so far is only the tip of an iceberg. The June Budget and September Spending Review will all see much larger cuts. The Institute for Fiscal Studies says the cuts may be up to £60bn in total over the next few years. It is reported that George Osborne has been seeking to learn lessons from the Dublin government, where devastating 'austerity measures to reassure financial markets' have been adopted. If so, one such supposed propaganda lesson is to exaggerate the initial level of cuts, and then seek the approval of a grateful nation when the cuts come in somewhat lower.
This lesson is a false one. The ‘gratitude’ of the population in Ireland is expressed in the lowest opinion poll ratings for the ruling Fianna Fail party since its foundation over 80 years ago and the obliteration of its coalition partners the Greens. The cuts packages have been worse than initially stated, as the deficit has predictably continued to widen. And the financial markets, seeing tax revenues plunge are so far from reassured that long-term interest rates are the second-highest in the EU, behind only Greece, having been one of the lowest.