The budget has blown apart the notion that Labour and the Conservatives are much the same. Many commentators during the election argued that the 2 parties had very similar policies on dealing with the deficit, and differences between them were exaggerated for electoral purposes. This view was strengthened during the campaign when the difference between the parties was reduced to whether or not to make £6 billion of early cuts. Now there’s a massive difference: Labour pledged to halve the deficit in 4 years, which they projected would involve taking £82 Billion off it (which in itself seemed ambitious), the coalition has said it will eliminate the structural deficit by 2014-15, therefore going twice as fast, adding a further £40 Billion reduction.
George Osborne has, with great fanfare, created the new Office for Budget Responsibility, the OBR. Its purpose was to undertake tasks previously done by the treasury, to make forecasts for economic growth, the size of government spending and borrowing, and comment of the shape of the economy. This has been billed as a great reforming measure, taking power from politicians (bad) and giving it to trusted experts (good). The trouble is that is doesn’t look very independent. Its chair, Sir Alan Budd, a former advisor to Norman Lamont (like David Cameron) has been working for the Conservative party for the last year. Recently, following a document leaked by the Guardian that presented a damning set of statistics on job losses, the OBR rushed out its own document, rather more favourable to the government, in time for David Cameron to quote from it at Question Time. For the OBR to have any credibility at all it need to be appointed by Parliament, not just the chancellor, and should, like the Bank of England’s Monetary Policy Committee, include a range of economists with different specialisms and differing approaches.
The key principle of the budget is that it will cut the deficit. It could have the opposite effect. As Keynesian economists like Paul Krugman and Will Hutton have pointed out, the extensive cuts and tax rises could have the effect of cancelling the limited growth that Britain is currently enjoying, and push us in to a deep depression. This would lead to a higher welfare bill, as the government would be paying far more in unemployment benefit to all the newly unemployed AND a reduction in income to the treasury due to less people paying less income tax. The paradoxical result of the cuts programme could be a rise in the deficit, due to it being too savage, and coming too early in the recovery.
Labour did have a plan to deal with the deficit. They simply didn’t talk about it very much. They proposed to cut the deficit by £82 Billion over 4 years, taking it down to 5.2% of GDP. Of that they projected that £25 Billion would come from growth, £19 Billion from tax rises (the ones Alistair Darling announced in the March budget) and £38 Billion from spending cuts. They gave some specifications about what might be in this £38 Billion of cuts, but generally avoided doing so, arguing that it was impossible to know the future level of unemployment and thus how high the welfare bill would be. Labour suggested that £11 Billion of this £38 Billion would be from efficiency savings (which always seemed hopelessly optimistic) but said little more than this, only that they would delay cuts until April 2012. Their failure to say more now seems like a tactical error – had they come up with a comprehensive, or a least a partial plan for spending cuts, the Tories would have been forced to do the same. We would then have had a real choice at the election rather than a phony one.
The Government has, as most new governments do, blamed everything on their predecessors. The central claim, in relation to the structural deficit (the part of the deficit not due to the recession) is that Labour overspent, creating a bloated public sector that lived beyond its means. However the problem might well have the opposite: Labour under-taxed. Labour tried to achieve Scandinavian level of public services with American levels of taxation. Does anyone seriously believe that the extra investment in Education, Healthcare, Housing, Local Government, Transport etc. were entirely worthless? The problem was not that spending was exorbitant; rather that Labour never built the tax base to pay for it. Again and again, in 1997, 2001 and 2005 they promised not to raise income tax, even cutting it in 2008 (in exchange for abolishing the 10p tax rate) as well as drastically cutting capital gains tax. All this was a result of new Labours timidity; they attempted to raise the standard of public services, but didn’t believe that people would be prepared to pay for it. The large increase in Government borrowing, during a boom period, was the inevitable outcome.
Naomi Klein’s theory, in her 2007 bestseller ‘The Shock Doctrine’ was that some kind of extreme event, be it natural disaster or financial crash would be necessary for neo-liberal ideologues to impose their polices on reluctant populations. George Osborne’s budget may go down in history the most wildly ideological, experimental reform to have occurred without any real crisis at all. There has been no threatened run on the pound, no degrading of the UK’s AAA credit rating and the British government’s bonds are continuing to sell well. The crisis has been created largely through discourse. Through much of 2008-9 the Tories seemed to losing the economic battle with Labour, as Gordon’s Brown’s actions, both at home and internationally, were seen to have been key in preventing total economic meltdown. At the Conservative conference of September 2009, George Osborne introduced a new demon – the deficit. Over the next 6 months, partly due to Labour’s failure to successfully challenge Osborne’s position, the deficit became viewed as the chief problem, the crisis facing Britain, the urgent priority. Never mind that the British economy was in the doldrums in the midst of a global downturn, the priority was to slash public borrowing in whatever way necessary. David Cameron’s speech at the same conference backed the same line, with a quasi-fundamentalist tirade about how everything wrong with Britain could be traced to the overbearing state. The slashing of departmental spending that we now see (an extraordinary 25% in most cases, 33% in the case of Welfare) is then a neo-liberal dream, created by a flawed analysis, dreamed up for political purposes which claims that ‘there is no alternative’.