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Why more cuts?

I guess many will be asking that question this week. Wednesday brought the Chancellor to Parliament to announce another £11.5 billion of cuts in Government spending in 2015-16. 

The next Election will be in May 2015 and these cuts will only begin to be felt six weeks before then and could drive voters to replace the Coalition with a Government willing to cancel them. So, is George Osborne taking a huge electoral risk? He would argue he had no choice. The austerity measures worked well in 2010-11 but in the last financial year government borrowing increased by £30 billion more than planned. If he did nothing to reverse this he would rightly be accused of breaking his pledge to abolish the budget deficit and lenders would demand higher interest rates, pushing mortgage rates up to hurt households even more. 

Half the cuts will come in Whitehall with exemptions for health, schools and overseas aid. Eight departments face 10% cuts and nine departments lesser reductions. Civil servants will lose their right to automatic progression up their salary band and pay rises will in future depend on performance, just like for most of us. Defence cuts will not mean further reductions of front-line personnel or equipment budgets. 

Set against these losers there will also be some gainers. Spending on troubled families goes up in the hope of cutting long term welfare costs. Council tax is frozen for the next two years and the Chancellor claims that together with income tax reductions and the car tax freeze, announced in the March budget, this will ease pressure on households. The Opposition refute this, pointing to falling living standards and low growth rates as evidence of Government’s failure. 

Mr Osborne’s answer is the £50 billion new money he is pumping into infrastructure capital investment projects, upgrading rail and roads, developing offshore energy production and a major social house building initiative. In Prime Minister’s Questions immediately before the Statement Ed Miliband attacked the Government for slowness in completing or even starting the infrastructure projects previously announced. Stimulating economic growth and creating new jobs is crucial if the Government hopes to be re-elected in 2015, so someone needs to drive these initiatives hard. 

A significant item in the Statement was bringing together health and social care budgets so that locally the NHS and local authorities will work together and by 2015-16 they will share a budget of over £300 billion. Mr Osborne pinched this idea from Labour but it will save the NHS £1 billion and enables them to coordinate with Councils over the care of frail elderly people occupying hospital beds because they have no other care support in the community. 

Underlying the spending debate is the fact that national debt as a percentage of GDP is 75%, the highest it has ever been and unsustainable in the long term. Party politics apart, the Chancellor really had no choice. It may hurt now but the pain would be far worse if the cuts don’t work.

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