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.