The impact of the chancellor's new cuts

George Osborne

Some economists have accused the chancellor of having misapplied household economics to the finances of the state - or of trying to balance the books by implementing so-called austerity policies in a way that undermines economic recovery and actually makes it harder to restore the health of the public finances.

Whether you agree with this or not, you may appreciate what is perhaps the nation having a laugh about it all - overstretched households seem to be driving quite a strong economic recovery by borrowing again to spend more. Meanwhile, the chancellor is warning that he is going to have to make further deep public spending cuts to reduce what he sees as an excessive rate of government borrowing.

Or to put it another way, households are behaving in a way that Keynesian economists say the chancellor should have been acting.

And the chancellor has on the kind of hair shirt that consumers should perhaps still be wearing, given that they went so spending and borrowing bonkers in the boom years.

Except that if you think there is momentum to this consumer-led recovery, if GDP (the value of our income) is going to continue to grow at its current annual rate of more than 3%, then even Keynesian economists would presumably say - for the first time since George Osborne became chancellor in 2010 - that this is an apposite moment to take action to reduce what they would agree is an unduly large deficit.

According to the treasury, the chancellor will make the following remarks later today, on a visit to the Midlands: "The deficit is down . . . That's the good news. The bad news is, there's still a long way to go. We're borrowing around £100bn a year - and paying half of that money a year in interest just to service our debts. We've got to make more cuts."

In fact, the Office for Budget Responsibility says public sector net borrowing will be £99bn this fiscal year, which is around 6% of GDP on the basis that we measure it in the UK and as measured on European Union definitions.

And although the deficit - the annual rate at which the government is increasing its debts - has fallen around five percentage points from the peak of 2009, the deficit remains bigger than that of all other rich developed nations.

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The big question is whether the UK's economic recovery will be helped or hindered by further shrinkage of the public sector”

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So on the basis that even - or perhaps especially - governments should not borrow more than they can afford to repay, the chancellor would be seen to sensible to be applying further spending cuts, or taxing more, if the country is at last becoming more prosperous again, of its own accord (as it were).

How big will those cuts be? Well on the Today Programme this morning, Osborne put the number at £25bn in the course of the next Parliament, after 2015 - and he gave a broad hint that, if he is still chancellor, the savings would be found in welfare budgets.

Which implies big cuts to jobless and disability benefits, given the prime minister made clear yesterday that pensions would be protected in quantum - although the government retains the lever of increasing the age at which pensions are payable (as the chancellor said, increasing the pension age yields huge savings).

The big question, of course, is whether the UK's economic recovery - at this juncture - will be helped or hindered by further shrinkage of the public sector.

If the recovery is hugely - perhaps excessively - dependent on interest rates remaining at record low levels, in that consumption, house building and housing-market activity, so rely on cheap money, then treasury hair-shirtism would be benign.

The point is that the Bank of England would be more minded to keep the policy interest rate at 0.5% and not unwind all that money creation if the public sector were to remain on its austerity course.

But that is to take for granted that there would be no recovery without consumers spending money they don't have - borrowing to buy - and without a new boom in a housing market where ratios of prices to earnings remain well above historic norms.

All of which yields the depressing conclusion that this is a recovery built on sand.

But, as I've said many times, the sand could turn to cement if businesses start to invest and if productivity were to improve, such that businesses felt able to increase wages faster than inflation.

And when I talk to business leaders, I am minded to believe that the recovery could yet become sustainable.

In other words, a same-old risky recovery could yet turn into a balanced recovery.

Which is why if consumers are taking lessons from Keynes (ha ha) and spending money they don't have - when the chancellor is rejecting that lesson at the level of the state - that may not be such a bad thing.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 553.

    Simple saving stop giving over 11 billion pounds in aid we cannot afford. Why do we do it?

  • rate this

    Comment number 552.

    Osborne and Cameron paid visits to China and showed interests in doing business with China. However, where is the business plan then? Many Brits’ language skills are very poor (an essential for foreign businesses) and behaved very rudely in oriental eyes. It seems to me that our government care neither innovation, nor exporting. How can economy recovery be true?

  • rate this

    Comment number 551.

    I went shopping this afternoon. High street was very quiet. It didn’t look like “January sale” at all. Many items for sale were no longer displayed in stores. They want you to go online to purchase them and to collect them from their stores. In Asia, many online items are much cheaper than in stores because they don’t pay tax honestly (I am a bi-lingual, so I can read the news).

  • rate this

    Comment number 550.

    Only time will tell whether a recovery will be sustained. The chancellor should keep in reserve some fiscal latitude in case the recovery should falter. There are so many variables- the euro, demand from BRIC and Mint countries, whether productivity improves

  • rate this

    Comment number 549.

    All that this useless Chancellor does is in the name of right wing dogma.

    Roll back the state - cut taxes for the rich - cut benefits for the unworthy poor - cut anything publicly funded (although the private sector are unlikely to fund the Armed Forces, the NHS, The Police etc)

    It's the usual myopic Tory view of the world where common sense and empathy for SOCIETY are ignored.



Comments 5 of 553



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