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The two ways in which George Osborne has made life harder for the Coalition

Last Updated: Tuesday, August 10th, 2010

Dear Subscriber,

George Osborne’s emergency Budget has been greeted positively by most of the media, by his own party and by the public. 57% of voters thought the new Chancellor had taken the right decisions, according to YouGov. Tory support broke the 40% barrier for the first time in a number of months.

The ratings agency Fitch welcomed the Budget’s “strong statement of intent” with regard to cutting borrowing and eventually reducing the overall debt burden. Standard & Poor’s was more sober in its judgment, warning that Britain’s credit rating could not be protected by “flicking a switch”. “This budget is clearly a very austere budget,” continued S&P, “but at the end of the day it’s a question of political will. It’s a question to what extent the government will be willing to push these things through.”

S&P are spot on. That is exactly where we are. The Budget was a statement of gargantuan intent. Where the previous government wanted to eliminate most of Britain’s structural deficit, George Osborne made it clear that he wanted it eliminated by the end of the Parliament. Long the least popular half of the Cameron/Osborne duopoly that has run the Conservative party since 2005, Osborne has been compared to Thatcher in recent days by swooning fiscal conservatives. If he delivers then he’ll deserve the comparison but it’s far too early to say.

While every Conservative would agree that the blame for the scale of the UK deficit is largely Labour’s (the UK deficit growing much faster than other recession-struck nations), Osborne has made his task harder in two key respects.

First, he has left significant parts of the state outside the spending clampdown: (1) The NHS, overseas aid and EU budgets are ring fenced; (2) Poorly-targeted benefits such as the Winter Fuel Allowance (only 18% of the pensioners who receive it are in fuel poverty) are retained; and (3) The outdated Barnett formula (that sees Scotland, Wales and Northern Ireland heavily subsidised at expense of (southern) England) is retained and not replaced by a focused formula that directs money towards economically disadvantaged communities. If ring fences had not been retained and certain badly targeted benefits dropped, the cuts in non-protected Whitehall departments would only need to be 11% to 14% in real terms by 2014/15. Because they have been retained the cuts will be an eye-watering 25%. If (as is widely expected) defence and education are subject to cuts of ‘only’ 10% then the cuts in the rest of government will be 33%. Cuts of 25% or 33% will test the Coalition to its limits. Local government – the power base of the Liberal Democrat rank-and-file – will face massive cuts. Smaller police stations will closed in many communities and prison numbers decline, risking stories of rapes and assaults by people who tabloids will scream should not be at-large. Arts funding will be cut substantially and few more sections of society are more articulate at organising protest. My gut instinct is that 25% cuts are simply not deliverable in a way that cuts of 11% to 14% are possible. The debate about ring-fencing and middle class welfare must re-open.

Second, Osborne has made his task harder by not crafting a more pro-enterprise agenda. The 1p annual cuts in corporation tax to 24p by 2014/15 are good but they have to be seen in the context of the 50p tax rate on higher earners, higher Capital Gains Tax (although less high than if the Tory Right hadn’t rebelled) and a £2bn bank levy. There are serious downside risks of lower growth in the years ahead because, not least, of the €urozone’s troubles. Osborne needed to do more to communicate that Britain really was ‘open for business’. I had expected more imaginative reshaping of the tax system. For example, higher taxes on ‘bad things’ (alcohol, fatty foods, pollution and property (with a mansion tax)), and for the proceeds of those taxes used to fund much lower business taxes. ‘Sin taxes’ could, for example, have been used to afford lower employer contributions on National Insurance as part of a bid to encourage job creation. In protecting capital spending and in an ambitious deregulation agenda the Coalition is signaling determination on growth but I had hoped the Budget would have gone further. George Osborne promised an autumn review of green taxes. Perhaps we’ll get a ‘sin taxes up, business taxes down’ reshaping then. Perhaps.

By way of footnote, and to balance my concern about the likelihood of him delivering on his promises, British taxpayers are already reaping a reward from George Osborne’s early announcements and determination. Changes in gilt prices mean that Britain will spend £6.6 billion less on debt interest payments because markets are no longer demanding such a premium for taking on UK debt. His goal has become easier to reach simply because he has announced it.

Tim Montgomerie

Duncan Smith and Pickles face the hardest road ahead

Tim Montgomerie has asked the key question about the Budget; namely, whether non-protected Government departments are capable of reducing their budgets by a quarter or more. In doing so, he notes that they won’t all be treated in the same way: some will be asked to cut by less than a quarter, and some by more. So who are the main winners and losers – in political as well as cash terms?

A picture is emerging of clear winners, partial winners, losers, and serious losers. It may change in the autumn once the smoke clears after the spending review, but at the moment it looks as follows.

The clear winners are Andrew Lansley at Health and Andrew Mitchell at International Development. The Coalition Agreement commits the Government to guaranteeing “that health spending increases in real terms in each year of the Parliament” and to “honour our commitment to spend 0.7% of GNI on overseas aid from 2013, and to enshrine this commitment in law”.

The partial winners are Michael Gove at Education and Liam Fox at Defence. Unlike Lansley and Mitchell, they have no guarantee in the Agreement. But unlike their other Cabinet colleagues, they won a particular commitment from the Chancellor on Tuesday. George Osborne said that he recognises “particular pressures” on education and defence spending.

The Government has different reasons for offering help to Gove and Fox respectively. In the case of Gove, David Cameron and Osborne believe that Gove’s Free Schools scheme is the Government’s flagship policy. It both helps to prove the Coalition’s radical credentials and keep the right of his party – not to mention the right-of-centre commentariat – happy. The plan is bound to have start-up costs, and the Treasury recognises this.

In the case of Fox, the Prime Minister and Chancellor understand that it would be fatal to break the military covenant and risk rows with the defence-sensitive Conservative backbenchers (many of whom have served in the armed forces) that could destabilise the Government. Furthermore, Cameron’s relationship with Liam Fox, the Defence Secretary, is as tense as his dealings with Gove, a key member of team Cameron, are cordial.

If the Education and Defence budgets are to be reduced by less than 25%, the budgets of at least some departments will have to be cut by even more. It follows, therefore, that all departments other than Health, International Development, Education and Defence are losers. Big losers. This has significant implications for the Home Office and the Justice Ministry, and the police and prison services for which they’re responsible.

But there are two departments in particular which look to be serious losers. They fall into this category for very different reasons, which are well worth pondering.

The first is the Department of Communities and Local Government. Local government is funded primarily by central Government. Lower allocations will mean reductions in local transport and social service budgets in particular (especially where councils are badly run), upward pressure on council tax, and a voter backlash. Conservative councillors will not be re-elected. The Party will start losing Councils – and retreat from its high water-mark in local elections.

Unhappy former councillors will bend the ears of Conservative MPs. They, in turn, will badger Eric Pickles, the Communities Secretary. He will thus feel the political heat more swiftly and directly than any of his Departmental colleagues. Pickles is an old local government hand – he led Bradford Council during the 1980s – and knows exactly what’s coming.

It helps that he’s made a series of announcements that have been greeted
enthusiastically by local Tory Councillors and activists. He’s been in place in less than two months, but has already announced the scrapping of regional development agencies, Home Information Packs, the Government Office for London, the Standards Board, the Norwich unitary authority and Council League Tables.

So although Pickles is a serious loser from the Budget, he’s as well-placed to handle the pressure as any Cabinet Minister. It helps that returning powers to local government – which inspired the radical measures described above – is obviously popular among Conservative Councillors. And he leads an effective Ministerial team, including the gifted Greg Clark, who’s heading up the Government’s localism drive.

The second serious loser is the Department of Work and Pensions. Some weather-making right-wing media commentators, such as Fraser Nelson at the Spectator and Peter Oborne at the Daily Mail, see Iain Duncan Smith, the Work and Pensions Secretary, as no less a standard bearer of radical reform than Michael Gove. No politician in living memory has been more committed to helping the disadvantaged than Duncan Smith – who set up the Centre for Social Justice after losing the Conservative leadership.

Unlike Gove, however, Duncan Smith hasn’t been pledged any special protection by the Chancellor. Indeed, Osborne’s budget speech sent a stark message to Duncan Smith’s department, emphasising the need to cut planned spending on benefits. Disability Allowance recipients are to face new medical assessments. The health in pregnancy grant is to go, as is the one-off Sure Start maternity grant. Housing benefit is to be capped.

But the real difficulty for Duncan Smith isn’t the scale of the reductions announced – which turn out only to save 5% of the £213 billion that benefits and tax credits are planned to cost by 2014-15. Rather, it’s the problem of reform costing money, as in education. One of the Work and Pension Secretary’s core convictions is that the benefit system perpetuates unemployment – because there’s no incentive to work as payments are withdrawn.

Duncan Smith would like to stagger the withdrawal of benefits. However, this would cost money – and the Budget was in the business of saving money, not spending it. According to Treasury calculations, the number of those facing very high benefit withdrawal rates will rise as a result of the Budget measures, not fall.

The Work and Pensions Secretary doesn’t face political pressure from the bottom up, as Pickles does from Conservative backbenchers and party members, but from the top down. Downing Street and the Treasury want him to save money quickly. He believes that one sometimes needs to spend to save. There could be trouble ahead.

His team, too, is less cohesive than Pickles': Steve Webb, his Liberal Democrat Minister; Lord Freud, who heads up welfare reform, and Frank Field – the Labour MP drafted in to advise on poverty – are strong characters with their own ideas, as is Chris Grayling, who coped well as Shadow Work and Pensions Secretary in Opposition, and now serves below Duncan Smith as a Minister of State.

Paul Goodman

As always, please call me on 0771 726 1570 with any questions.

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