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Seven Observations about the Comprehensive Spending Review

Last Updated: Friday, October 22nd, 2010

George Osborne is not for turning on his deficit eradication goal. Despite a report in the FT, two weeks ago, that he was planning to “reprofile” (i.e. delay) the spending cuts the Chancellor used his CSR to confirm his plan to eradicate the deficit by 2015 is on course. Although, this week, new Shadow Chancellor Alan Johnson appeared to retreat from Labour’s warnings of a double dip – George Osborne wants the Bank of England and monetary easing to supply the boost if the economy falters. Mr Osborne rejects Keynesianism. He does not see fiscal policy as a demand management tool. His single-minded focus is on reducing the deficit.

The fiscal retrenchment is going to be a long, tough process. George Osborne has rejected advice to frontload the spending cuts and backload the tax rises. By spreading out the spending cuts evenly over the next four years some of the least palatable cuts will be being made in the run up to the next General Election. That’s questionable politics. Questionable on the growth front is the decision to frontload the tax rises. This imposes burdens on business when the economy is at its weakest.

Osborne is edging towards a growth agenda. Although Osborne does not see government spending as having a demand management role he appreciates that certain spending is much more economically useful.  The decision to protect schools and science spending, to give the go ahead to Crossrail (a victory for Boris Johnson) and other big capital projects and to invest in 75,000 more apprenticeships was proof that he has the beginnings of a growth strategy.  I’d also be interested in feedback from ConservativeIntelligence subscribers on the £2.5bn bank levy. Lobbying by the industry seems to have won the day and this looks like the minimum the Chancellor could get away with politically. On Radio 4’s Today programme, Andrew Tyrie, Chairman of the Treasury Select Committee, joined the growing number of Tory MPs who think ‘banker-bashing’ shouldn’t go one step further.

Mitchell, Lansley, Gove and Fox won most in the spending carve-up. Andrew Mitchell and Andrew Lansley didn’t have to fight hard for the real increases in their development and health budgets. Both departments had been promised growth in the Tory manifesto. Gove did well to get protection from inflation for schools. My understanding is that the squeeze on defence was much less because of the very public campaigning by Liam Fox and other defence interests. Numbers 10 and 11 are both unhappy at that campaigning however and Fox’s partial victory has come at a heavy price in terms of his reputation with leading members of the government.

George Osborne can be too politically-motivated. At the end of his CSR statement the Chancellor announced that total cuts would be only 19% across most departments, not 20% as was once advocated by Labour. It was a gimmicky flourish that left Tory backbenchers cheering inappropriately at the end of a statement that would be causing many viewers a lot of pain. Worse, the claim didn’t stand up to scrutiny.

The Coalition fell into the IFS elephant trap… again. To fall in the IFS elephant trap once might be forgiven as unfortunate. To have not have learned from the experience after Budget and to repeat the error with the CSR looks careless. The Coalition needs to do much more to protect itself from the allegation that it is hurting lower income groups. Yet again, earlier today, Nick Clegg was reacting to the IFS rather than the whole government getting on to the front foot and arguing that its welfare and school reforms, as well as the protection of health and education spending, amount to a good story to tell. Labour must not be allowed to present the Coalition as regressive. That could be fatal to a durable Lib/Con partnership in government.

Even the Breakneck Coalition won’t touch the Winter Fuel Allowance and Free Bus Pass.  It may be a fast reforming Coalition but even this government stops short of reforming the benefits enjoyed by all pensioners, regardless of income.  George Osborne decided that any erosion of the WFA and similar benefits could be a ‘read my lips’ moment for David Cameron. George Bush Snr was sunk by his decision to renege on his promise not to raise taxes. The Daily Mail is still struggling to forgive Cameron for not giving the British people any kind of post-Lisbon vote on Europe. It might have gone into full betrayal mode if promises on pensioner benefits were broken.

 Tim Montgomerie

 

HIGHLIGHTS FROM THE LAST WEEK ON CONSERVATIVEHOME

Merkel and Sarkozy call for new EU Treaty: “Yet again the French-German axis has come together to propose next steps for the European project. The German Chancellor and French President want a new Treaty that would give the EU new powers to manage the €urozone. These powers would include carrots to help over-borrowed nations get back on their feet and sticks with which to punish future Greeces, Spains and Portugals. Eurosceptics always said monetary union would require fiscal union and, sure enough, Merkel now realises that controls on €urozone states’ fiscal freedoms are, indeed, essential.” More via http://j.mp/dfZI35

The lifting of local government ringfencing: “The Chief Secretary to the Treasury is lifting the ring fencing requirements on £7 billion worth of central Government funding to Town Halls. This is very welcome both in terms of the advance of local democracy and also in allowing the money to be better spent. One of the frustration for councillors of spotting some unnecessary spending – but then having it patiently explained that it didn’t cost the council taxpayer anything it was “free money” from some central grant or other – but that if it wasn’t spent on a particular thing in a particular way we couldn’t spend it on anything.” More via http://j.mp/bcwDBt

Reducing the public sector headcount by natural wastage: “About 400,000 people leave jobs in the public sector every year. If you didn’t replace just one in four of those leaving, the total employed would fall by 100,000 a year. So a headcount reduction on the scale foreseen by the OBR could be achieved mainly through what economists call “natural wastage”, rather than redundancies.” More via http://j.mp/bI3ZCi

Liam Fox’s new enemies: “Liam Fox has fought tenaciously to defend his department. Tenaciously is my word, his critics would say he has fought dirtily. It’s made him considerable enemies in the process. Enemies within the MoD who do not like the strategic priorities he chose. Enemies within the Treasury who resent his resistance to their axe. Enemies within Downing Street who do not approve of Fox’s hawkish worldview. Enemies within the Cabinet who disapprove of the often public means he has used to limit the cuts to his budget.” More via http://j.mp/ciG2xu

£90bn of privatisation proceeds: “The Adam Smith Institute published a report calling on David Cameron to sell the government’s stakes in the nationalised banks, Royal Mail, Network Rail, BBC Worldwide, Channel 4 and other state assets. The report – by Nigel Hawkins – estimates that £90 billion could be raised.” More via http://j.mp/bVR0xD

Key components of Lord Young’s Health & Safety Review: http://j.mp/9bkqpp

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