Is there anyone left who really believes that George Osborne is
cutting public spending because he wants to be prudent with the
nation’s finances? Unfortunately I think the answer is far too
many.
Most macroeconomists have had deep suspicions or worse for some time,
as we could see what damage austerity was doing to the economy. You
might say that issue is past as growth has returned, but this would
be quite wrong. What is now becoming clear is that the fears that
some
economists had all along that delaying the recovery in demand would
lead to permanent damage to supply have indeed come to pass.
Those who were not macroeconomists should have realised what was
going on when the government started cutting taxes. How do you
explain cutting inheritance tax one day, and then trying to justify cuts in tax credits because ‘we have to get rid of the budget deficit’
the next, other than helping your own at the expense of the poor?
Even if that did not convince you, I suspect what will happen in the
next few years will leave you in no doubt. Everyone knows it is crazy to cut spending that would have generated more income
than it costs. Appearing to balance the books by paying for current
spending (or tax cuts) by selling off your assets is not being
prudent at all. Yet I suspect we will see more and more announcements
from the government that do exactly this in the next few years.
To take just one example, we have the announcement
of yet more cuts to HMRC, the government’s tax collectors, as part
of the new spending review. No doubt we will hear a lot of talk about
reorganisations to make the service more efficient. Just as we did
with the previous cuts. In March 2015 it took an average of almost 15
minutes to have your phone call answered by HMRC. For the government
that is a sign that the service needs less people! I do not
know if the OBR allow something for the impact of HMRC cuts in their
estimate of overall tax receipts, but if they have not done so
already I think they should start.
This is a very obvious example of apparent savings that in fact
reduce net revenue. Many more involve cutting public spending in a
way that increases costs to the private sector, leading to lower
productivity, lower incomes and then lower taxes. But for a
politician facing a tame media who just has an eye for the headline
numbers none of this matters.
The letter
that the Prime Minister wrote to his local council complaining about
its cuts has got some publicity. But what I found most revealing was
Cameron’s suggestion that the council pay from some ongoing
frontline services by selling more assets. The council leader in his
reply explains that using the income from these sales to pay for the
council’s running costs “is neither legal, nor sustainable in the
long-term since they are one-off receipts”. The Prime Minister
offered the services of No. 10’s policy unit to help the council.
It sounds to me that the council should in turn be offering some of
its wisdom next door at No. 11.
