The Autumn Spending Review: A Political but not an Economic Fix?

After the Government’s spending review on 25th November, I was struck by how experienced political commentators were fumbling to get a grip on the detail of its plans and forecasts. What lies beneath the headlines and soundbytes will become clear with time, but some general contours and contradictions are already emerging from the Chancellor’s “smoke and mirrors”.

The headlines will say that George Osborne reversed controversial proposals to cut tax credits – a U-turn for which shadow Chancellor John McDonnell quickly claimed credit for the Labour Party. But, they have not been reversed for people on the new Universal Credit system – a reform critics see as a serious benefits cut in itself. Moreover, tax credits will remain frozen and diminish in value. Osborne devolved some control over elements of local government finance, but with multiple strings attached. Council tax rises are permissible, but must be ring-fenced to adult care. Business rate rises are permissible, and local authorities will retain the returns. However, additional rate levies will depend on the consent of local business elites. Councils will have the same to spend in “cash terms” in 2020 as they do now. This announcement foreshadows major public service reductions, but on a scale impossible to anticipate without knowing other volatile variables in advance. The government, and councils, are investing hope in the integration of health and adult social care as a way of delivering austerity without outright retrenchment. Yet according to Lord Porter, Chair of the Local Government Association, a new round of cuts is likely to push councils to the edge of collapse. Osborne has spoken frequently of Britain moving from high welfare-high tax to a high wage-low welfare economy, predicated on increases to the minimum wage. Yet, an hourly living wage is only a real living wage for people working enough hours in the week to surpass income poverty thresholds. It will not be a living wage for those on part-time or zero hours contracts – or those in precarious self-employment.

Whatever the merits and drawbacks of specific cuts and measures, the holy grail of Osborne’s Chancellorship is delivering a budget surplus in 2020. The Office for Budget Responsibility suggested he will be boosted by an unexpected increase in tax receipts through the middle of this parliament, a claim immediately qualified by Chairman Robert Chote. Even if he enjoys good fortune with the tax receipt numbers, Osborne faces formidable barriers. Responding to the spending review, John McDonnell was quick to remind us of the Chancellor’s poor forecasting record. In 2010, the government said it would eliminate the budget deficit by 2015. Now, we are told this will occur in 2020. With the support of the Labour Party, the media and much of the public, the last government set a welfare-spending cap. Today, we were told the cap has been breached and will not be met until 2019. Ultimately, all depends on forecasts for sustained GDP growth at rates of 2.3 or 2.4% for each of the next five years. But such a stable pattern would be exceptional. In the best-case scenario, GDP growth will fluctuate in an upward direction. In the worst-case scenario, underlying weaknesses in the economic recovery will soon trigger another recession.

In short, it is plausible that before long, the government will have to revise its forecasts again and come back for more. If a budget surplus remains the primary goal of British economic policy, further attrition of the welfare state and corrosion of the public realm is the price we will be asked to pay. Even then, the goal could be elusive.

Jonathan Davies – Director, Centre for Urban Research on Austerity

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