2015 12 Editorial 2 – Osborne’s Sleight Of Hand

Osborne’s Sleight Of Hand

Chancellor George Osborne was outraged when the House of Lords urged him to rethink his decision to cut tax credits. He cited the old tradition that the Lords do not amend money bills. With 821 members the Lords is the second largest legislative chamber in the world. However, it does not have a Conservative majority. Following the Lords opinion, the eccentric Conservative Backbencher Jacob Rees-Mogg suggested the appointment of an extra 150 Conservative Peers to avoid any further defeats.

Osborne was initially determined to press ahead with the cuts. But it became apparent that a significant number of Conservative backbench MPs were unhappy with the Chancellor. Around 71 hold marginal seats and feedback from their constituents told them that their tenure was under threat.

One would like to think that the Lords opinion and Conservative Backbenchers’ anxieties persuaded Osborne to scrap the cuts to tax credits. It transpired however that the Office For Budget Responsibility gifted him a £27 billion improvement in public finances through a long-term forecast of higher tax revenues and increased economic growth. But the £27bn could also be seen as an example of creative accountancy; plucking money from thin air to get Osborne out of immediate difficulties. It was this ‘gift’ from the OBR that enabled him to scrap the cuts.

The OBR also allowed him to reverse his decision to cut the police budget. Instead it will rise by £900m in cash terms by 2019/20. This however may have had more to do with the terrorist attacks in Paris and the inevitable media hysteria over potential threats to Britain’s streets. This was revealed with an increase of £500m in the counter-terrorism budget. But all is not well with policing. The Metropolitan Police Commissioner and Chief Constables are still feeling the effects of a 20% cut since 2010, with a loss of police officers and forced mergers of backroom staff. And a reduction of 30% in the Home Office admin budget will add to problems with policing across the country.

Osborne’s U-turns have also been possible as a result of proposed cuts in government departments. In addition to cuts in the Home Office budget, there are to be cuts ranging from 14% to 37% in Work and Pensions, Justice, Environment, Energy & Climate Change, Business, HM Treasury, Communities and Local Government, and Transport. Some of these cuts will be offset by increases in capital spending but the overall trend will be downward.

The diminution in Whitehall departments, with the inevitable loss of jobs, will have an adverse knock on effect in the wider economy. Total government spending this year will be £756bn, rising to £821bn by 2019/20. In percentage terms it will fall from just under 40% of GDP to about 36.5% in 2019/20. Osborne claims that the projected 36.5% is economically manageable. But it has the feel of a political decision to shrink the state rather than posing the question: what do we want the state to do? And then setting the appropriate level of expenditure.

Shrinking the state places greater responsibility on local government to deliver key services. By cutting support for councils by 56% over the next five years, Osborne is forcing them to raise local taxes to pay for services such as social care. This will mean councils incurring the wrath of voters rather than the government.

Given a level playing field, devolving responsibility for delivering services to local government is a desirable aim. But the playing field is far from level. Councils in wealthy areas, mostly in the south-east, are able to raise more revenue than those in poor areas, mostly in the midlands and north. A One-Nation Conservative government is simply not working.

However, not all government departments will experience budget cuts. Defence, Education, Health and Overseas Development will not only be protected but will benefit from spending increases. The NHS is to receive £3.8bn in 2016/17 out of an extra £8bn promised by 2020. The budget for the NHS in England will rise from £101.3bn this year to £119.9bn in 2020/21. But this amounts to less than 1% a year. Moreover, the share of GDP allocated to health will fall from 7.3% this year to 6.7% in 2020/21. And the NHS will have to find £22bn in savings, while nurses take out loans to pay for training. Osborne gives with one hand and takes with the other

The situation for pensioners continues to improve. According to a report by insurers Canada Life, since the recession of 2008 and the end of 2014 pensioners incomes rose while workers’ pay stagnated. Canada Life have calculated that during this period retired household income increased by almost a third, while working households experienced a drop of 4.4% in real terms. This year has seen a slight improvement with average pay, including bonuses, increasing at an annual rate of 3%. However, Osborne’s boast that living standards have risen is entirely due to the improved finances of retired households; a point missed by the pro-Conservative press. And retired households will see a further boost in living standards with a scheduled pension increase of 2.9% from next April.

On the other hand, the introduction of universal credit will mean further misery for millions of working households. A further £12bn of welfare cuts, which will include housing benefit, over the next five years, will be reflected in universal credit, the new benefits system expected to be up and running in 2016/17. The Institute For Fiscal Studies have calculated that under universal credit 1.9m working families will be £1,400 better off by 2020, but 2.6m will lose £1,600. Furthermore, the IFS claim that “new claimants will receive significantly lower benefits than they would have done before the July changes.” In the meantime, the Department for Work and Pensions is trumpeting the good news while suppressing the bad.

In his statement to Parliament, Osborne said that bringing down the debt and reducing the deficit are at the heart of his programme for economic recovery and national security. So far his record is not a good augury for the future. He will have failed at the end of his tenure as Chancellor if his gamble on future growth and tax revenues falls flat and there is little left of the nation’s assets to sell. A point made by John McDonnell, and entirely missed by his colleagues, when waving a copy of Mao’s Little Red Book. Osborne has continued Thatcher’s policy of selling off state assets, which are often bought by foreign government-owned companies. This was the substantial point behind John McDonnell’s unwise stunt in waving a copy of Mao’s Little Red Book: many things vital to Britain are now owned by China.

At the end of the 2015/16 fiscal year National Debt is expected to exceed £1.5tn, about 82.5% of GDP. In 2005 it was less than £0.5tn, 38% of GDP. Following the financial crisis of 2008 it increased rapidly, reaching over £1tn in 2011. According to the OBR the budget deficit is forecast to be around £65.5bn at the end of this fiscal year in April 2016. Meanwhile government borrowing remains high, with in excess of £54bn borrowed so far this year. Osborne’s aim of a £10bn budget surplus at fiscal year end 2020 looks a tad optimistic.

Osborne’s Autumn Statement appeared to take Labour by surprise. It wasn’t prepared for a blanket removal of cuts in tax credits. While Osborne’s economics are suspect he is setting a political agenda that appears to resonate with voters. Labour needs to up its game and reassert the case for a strong welfare state supported by a strong economy.

A high wage, low welfare economy is Osborne’s mantra. He is delivering on the latter and believes that the so-called national living wage and a modest infrastructure investment programme will deliver the former. Labour must go further and argue the case for strong state-led investment to increase growth and productivity, the best guarantee of a high wage, high welfare economy.

Corbyn’s election has moved Labour to the left, much to the annoyance of many of his colleagues. His low-key but effective performance at Prime Ministers’ Question Time has often wrong-footed Cameron. It could be said that his persistent questioning of the effects of austerity led to the reversal of the cuts in tax credits. He is not a natural orator, but he has a unique way of making his point. His style is a welcome relief from the blustering bravado of Blair and Cameron.