Osborne hints at truly radical change

Allister Heath
IT was not exactly the most convincing of public relation stunts – and predictably enough, George Osborne’s pledge yesterday to engage the public in consultations on the upcoming spending review in a way which would “strengthen and unite” the country was met with some derision. It is hard to imagine that anybody who works in the public sector or who is in receipt of subsidies will put their hands up and volunteer for their lifeline to be cut off. Yet Britain’s disastrously bloated government must urgently be hacked back to a more affordable size if we are to avoid bankruptcy – as even Lord Myners, the former City minister, now admits – and that will mean making tough and therefore unpopular decisions.

But there was much in Osborne’s announcements yesterday that was actually brave and carefully thought out. The best news is that all ministers will have to measure their spending against a set of tough benchmarks. If these criteria are genuine, and not just for show, they could trigger a reengineering and downsizing of the state of a kind last seen in the 1980s, rather than merely a random decimation of spending across the board. This would be a much more effective way of reducing the deficit, would ensure that services are less at risk and could transform Britain’s long-run prospects of achieving a healthy society and strong economy.

The questions include whether every state activity is essential to meet government priorities; whether the government need to fund the activity; whether it provides substantial economic value; whether it can be targeted to those most in need; how it can be provided at a lower cost and more effectively; how it can be provided by a non-state body or citizens, wholly or in partnership; how non-state providers can be paid to carry out the activity according to results; and whether local bodies could be in charge. The questions imply that some operations could be shut down, others privatised and yet more contracted out.

The problem for the coalition is that its cuts will be extremely unpopular, regardless of how much “consultation” it engages in. Its only hope is that the spending reductions create enough space for a private sector revival, which in turn would boost the financial health and prospects of its electoral base. But the prospects for this are not as good as they should be.

Contrary to what pseudo-Keynesian economists claim, there is plenty of evidence that fiscal consolidation usually goes hand in hand with economic recovery, especially when deficits are as gargantuan as Britain’s is today. There is just one key condition: the deficit needs to be eliminated via reduced public expenditure – and especially cuts to current spending and benefits, rather than infrastructure projects – and not with higher taxes on income and capital, which are the most damaging of all. Regrettably, the UK is about to hike capital gains tax, is retaining all of the recent crippling income tax hikes (including the 50p rate) and may well restrict tax relief on pensions. These policies will endanger much of the good work that Osborne is planning.

Mark Wise of Laffer Associates (founded by the supply-side economist) describes the UK as the canary in the Keynesian coal-mine. It is starting to look as if Osborne is serious about cuts – let us hope he is equally serious about creating a pro-growth tax system that allows the private sector to take the place of the retreating state.