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The Limits to Austerity

The challenge every Chancellor faces is finding the right balance between wise management of the economy and meeting the expectations of the voters. In 2010 George Osborne took charge of the economy with an unsustainable national debt and budget deficit

He promised to eliminate the latter by 2015 but failed because the tax rates and cuts in public spending to do this were harsher than the voters would accept. After May’s election, he repeated his promise to eliminate the deficit, now by 2019. Once again this would require major cuts in public spending, including £12 billion from the welfare budget. Inevitably, the Opposition attacked his plan to cut the tax credits that are crucial for the poorest, even if they are in work.

On Wednesday, he prudently cancelled that plan until tax credits are phased out with the nationwide implementation of the Universal Benefit, expected to be by 2020. In his Autumn Statement he also responded to voter expectations by allocating an additional £10 billion per year to the NHS; scrapping any further cuts to police budgets, as well as protecting the defence, overseas aid and education budgets. All this was possible because other Whitehall departments took heavy hits to their budgets. More important, was the apparently ‘surprise discovery’ that increased tax revenues and lower than expected interest payments on Government borrowing gave him £27 billion more to disperse than expected, in his March budget.

All this thrilled his backbenchers and won Osborne a good press but it did not impress the Shadow Chancellor who claimed credit for the U turn on tax credit cuts and complained that 14,000 of those already receiving the Universal Credit would still suffer the full cut. He accused Osborne of ‘incompetence and poor judgement’, but blunted his attack by quoting Mao’s ‘Little Red Book’ and by giving the Chancellor his own signed copy, to the embarrassment of Labour MPs.

Nevertheless, there are serious questions Osborne must face. How real is the £27 billion pot the Office for Budget Responsibility has fortuitously found? If tax receipts don’t increase and interest payments do not remain as modest as they expect, the 2019 target could be missed like the 2015 target. Underlying the Chancellor’s plans is an assumption that the British economy will continue to grow robustly, but productivity is still poor and our major Eurozone markets remain weak.

Household debt is still too high and interest rates may need to be raised to cool consumer demand. If, as Osborne has repeatedly claimed, ‘we are all in this together’, delaying the end of tax credits is welcome from a social justice perspective, but questionable if he is gambling with the nation’s finances in his bid to be Cameron’s heir apparent. Another question is how the costs of providing for the 20,000 refugees the Government is committed to accepting, will be met; there was no mention of this in the Statement.

The tension between what we citizens expect and wise economic policies, is one Christians should understand. We will experience personally it as the tension between self-interest and loving our needier neighbours. James 2:14-16 comes to mind.