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UK Comprehensive Spending Review: "There Is No Alternative"

Alastair Newton - 29th October 2010

In an echo of then Prime Minister Margaret Thatcher’s famous “TINA” maxim from the 1980s, UK Chancellor George Osborne, presenting the outcome of the Comprehensive Spending Review to parliament on 19 October, asserted that it was the only option. And as with Mrs Thatcher’s 1980s reform programme, other developed economies – and especially those with large sovereign debt – will look on with interest to see if the UK’s politically and economically bold course can be pursued successfully.

Pain For All – But Not Necessarily Equal Pain

Although Mr Osborne’s presentation ran to around 10,000 words, it remains little more than a framework with much detail still to be worked out by central and local government bodies responsible for implementation. Any assessment of its political impact must at this stage therefore remain preliminary and tentative. Nevertheless, Martin Wolf probably got it just about right on the politics when he commented on FT.com immediately after Mr Osborne had finished speaking as follows: 

"...the politics of the cuts do, at first glance, look clever. The ring-fencing of health and development assistance and the protection of schools were readily presented as 'progressive'. The pain is concentrated relatively narrowly. This may prove good politics, provided the government can manage the backlash from those directly affected."

That said it is questionable whether “those directly affected” is a “relatively narrow” concentration of the pain. Indeed, more or less everyone will be negatively affected to some extent – especially if one takes account of the previously announced increase in the standard rate of VAT from 17.5% to 20% which comes into effect on 4 January 2011 and which should be seen as part of the CSR.

Public Sector Pain

More specifically, those who may be hardest hit are public sector employees facing close on half-a-million job losses over the next four years (through “natural wastage”, the government hopes), a figure which presumably includes the Local Government Authority’s (LGA) initial estimate of 100,000 job losses in local government. In addition, public sector employees (already subject to a two-year pay freeze for all but the lowest paid) will see their pension contributions increase by an average 3% of earnings.

Although the public sector unions do not seem inclined at this time to move towards industrial action – preferring, it appears, to try to win over wider public support for pushing back against cuts in public services (and thereby save jobs) – the government may still have to face down the unions at some stage as the cuts begin to bite.

Coalition Compromises

Two other groups with which the government may have to grapple are the two coalition partners’ respective “core” supporters. For the Conservatives, particular points of contention will likely include higher tax bracket earners who are set to lose child benefit; and Southeast England commuters who will have to absorb successive increases in rail-fares well above inflation. For the Liberal Democrats (LibDems), one of several areas of concern is likely to be the prospective hike in university tuition fees which goes against one of the party’s key pre-election pledges.

Liberal Democrat backbenchers and the wider party membership are also likely to focus on the extent to which the cuts are truly “fair”, as Mr Osborne claims, in terms of their impact on society as a whole; in particular, some commentators (eg the Institute for Fiscal Studies, an influential think-tank) are already claiming that, on the basis of the government’s own data, the poorest 10% in society stand to be among the hardest hit. Equally some Conservative backbenchers and party loyalists will be dismayed by, in particular: the delay in beginning work on replacing the Trident nuclear missile submarine fleet until 2016 and the reduction in the number of missile (which, paradoxically, will be popular with the LibDems and which may have been a trade-off to secure support for pushing up university fees); proposals to cut the number of new prison places by 1,500; and the 4% pa cut in the police budget. 

Furthermore, if my initial reading of the CSR is correct the government as a whole may yet come under fire over the supposedly ring-fenced health budget. For sure, the headline is that the National Health Service (NHS) budget, currently just over £106bn pa, is to grow by 1.3% in real terms by 2015; but that increase looks like being more than offset by 20% “efficiency savings” to be achieved by 2014. 

A Radical Agenda

Putting all these measures alongside, in particular, far-reaching reforms to welfare spending (and discounting the review of defence spending which experts broadly agree has fallen some way short of “strategic”), the government has gone a long way towards living up to the 12 August 2010 assessment of The Economist that; “David Cameron’s Britain has embarked on the toughest fiscal tightening and most drastic decentralisation of any big, rich country”: and that, in so doing: “Mr Osborne has …nailed his radical colours to the mast by relying on spending cuts for three-quarters of the squeeze…” [1].  In other words, whatever the economic pros and cons of its approach, the government has embarked on a socio-political course which stands to result in paradigm shifts in the way in which British society works which could prove to be just as dramatic and far-reaching as those which Mrs Thatcher wrought in the 1980s.

It is hardly surprising, therefore, that some commentators – eg Tom Clark writing on 20 October on guardian.co.uk – have suggested that the CSR could be this government’s poll tax, ie the deeply unpopular measure which precipitated riots on the streets of Britain in 1989/90 and which, despite its withdrawal, contributed significantly to Mrs Thatcher’s downfall in late 1990. However, although there is no doubting the unpopularity of some of the measures in the CSR and that outbreaks of civil unrest are likely in response, comparing the CSR to the poll tax is likely to prove more than somewhat hyperbolic.

Underpinning this is the fact that the majority of the British electorate viewed the very principle of a poll tax as unfair from the outset, whereas opinion polls today suggest that a majority of Britons support in principle at least the type of austerity programme which the CSR sets out. That said, it may be some time yet before we know the extent to which support in principle translates into acceptance in practice – and it is worth noting that a YouGov poll taken after the CSR announcement shows the country divided at 41% in favour and 41% against.

A Hard Road Ahead

The first true test of public reaction will probably come at the 5 May 2011 local elections in England and Wales and referendum on electoral reform. By that time: the detail of the CSR will be much clearer; the aforementioned hike in VAT will have taken effect; and local councils will have had to implement the first of the four rounds of 7.1% pa cuts. The LibDems, whose opinion poll ratings have halved to around 10% since the general election last May, stand to suffer disproportionately in a protest vote as they are much stronger in local government than they are nationally. Furthermore, a “no” vote on electoral reform (ie shifting from “first past the post” to a proportional representation system) – which opinion polls suggest is increasingly likely – would constitute a major blow to the party’s hopes. In these circumstances, there is a distinct possibility that some LibDem backbench MPs could defect (to Labour, most likely); but it is unlikely that any ministers would cross the floor and extremely unlikely that defections would be anywhere near the magnitude which would put the government’s majority in jeopardy.

Indeed, much as compromises which have had to be struck rankle with members of one or both parties, it is one of the strengths of the CSR that it is the child of two “parents” rather than one. Furthermore, it enjoys the total support of two senior Conservatives, ie Prime Minister David Cameron and Chancellor George Osborne, and two senior LibDems, ie Deputy PM Nick Clegg and Chief Secretary to the Treasury Danny Alexander. These facts alone should help to keep the coalition firmly together for the foreseeable future.

That said, if the 5 May elections and referendum offer the first major test of the government’s resolve, even tougher ones may follow. As Mr Osborne himself has repeatedly suggested in the past few days, “it’s a hard road” ahead for much of the period through to the next general election, which the government has stated it intends holding in May 2015.

From that perspective at least, front-loading fiscal austerity – as the CSR does to a significant extent – makes sense. In a nutshell, it reinforces the idea that the coalition has a big economic/electoral interest in hanging together until 2015 in the hope (perhaps expectation) that the biggest post-Lehman-collapse spending cuts of any major economy and the biggest cuts in the UK itself since the 1970s will indeed pull the economy round before the government has to go to the country.

Alastair Newton is Senior Political Analyst at Nomura International plc. The views expressed in this article are those of the author and do not necessarily represent those of Nomura International plc. 

NOTES

[1]  See, eg, “Experts see lack of strategic thinking in hasty review” by James Blitz, Financial Times, 19 October 2010.