Osborne wobbles but 2020 is still a big ask

I have long thought that George Osborne would eventually have to scale back his planned public spending cuts. Sooner or later, the circles in the 2015 dilemma would wobble. Taxes would increase, cuts to services and welfare would be scaled back and the deficit reduction timetable would be lengthened. I didn’t expect it to happen so soon, though. I thought we’d get at least one more sabre-rattling budget before a combination of ‘unexpected events’ gave cover for a retreat.

So, like many other people, I was surprised when I saw the public spending projections. What looked insane in December and was modified to merely ludicrous in March now seems almost reasonable by comparison. The £42 billion cut in day-to-day public service spending has become an £18 billion cut with an extra year to achieve it.

Source: OBR Economic and fiscal outlook

That’s not to say that there won’t now be significant reductions in public service spending. As Paul Johnson said, defence is the main beneficiary of the slower pace of cuts. It has been added to the ring-fenced departments:

The gentler path does not however represent a let up in the overall scale of cuts – other than for defence. Spending in unprotected departments (those other than health, overseas aid, schools and, now, defence) will still have fallen by about a third in real terms between 2010- 11 and 2019-20.

How has the Chancellor managed to slow the pace of public service cuts? By pushing the deficit reduction timetable out to the last year of the parliament, increasing taxes by £6.5 billion and cutting welfare by £12 billion.

And, of course, that’s where the problems start with all this. The welfare cuts will hit the working poor, as we knew they would. Given ring-fencing of other benefits there was nowhere else the axe could fall. The Chancellor has acknowledged that the only way tax credit expenditure can fall without impoverishing millions of people is if wages rise. It is by no means certain, though, that his living wage will make that much difference. I’ll go into this in more detail in a later post but there are lots of good reasons why it might not. Furthermore, the attempt to reduce housing benefit costs by holding down council and hosing association rents is really another cut to public service funding in disguise.

The impact of the budget proposals, on top of what had already been announced, are likely to be horrendous and, as this IFS chart shows, will fall most heavily on the poorest.

Welfare cuts on this scale will cause a lot of distress to many of the hardworking families the government keeps telling us about and will create problems for the government just at a time when lots of other things are getting difficult. I still don’t think they are achievable and I don’t believe the government wants or is prepared for that kind of aggro.

If the cuts don’t, in the end, deliver £12 billion savings, the government will need to raise taxes, increase public service cuts or push its deficit reduction timetable into the next decade, which is what the IMF thinks will happen. I’m not sure George Osborne would want to miss his deficit target for another parliament but even this modified timetable is still a big ask. He had one wobble on Wednesday. Will we see another one before the decade is out?