Tags: UK | Spending | Cuts | Rely | Will | Luck

UK Spending Cuts to Rely on Will and Luck

Wednesday, 20 Oct 2010 02:29 PM

 

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Britain's toughest public spending cuts in living memory will be achieved only with a mix of unprecedented political will and a dollop of economic good luck.

Conservative finance minister George Osborne put flesh on Wednesday on the bones of some 80 billion pounds ($125 billion) of cuts that he announced in an emergency budget in June.

Average spending by government departments will fall by 19 percent over the next four years — slightly less than the drop of a quarter expected for most departments.

But the cuts will come at a cost of almost half a million public sector jobs and a squeeze on welfare that is nearly two thirds bigger than what was promised in June.

Job cuts on this scale will go beyond efficiency savings and require scaled back or reduced quality services, piling pressure on the government to renege on its plans.

Welfare savings are even harder to bank with certainty as they hinge partly on the long-term unemployed finding jobs, and government growth forecasts for when the cuts start to bite next year are more upbeat than those of many other economists.

Osborne was clear that he believed Britain's budget deficit of 11.1 percent of gross domestic product (GDP), the largest in the G-7, left him no option to such drastic action if the country was to avoid a Greek-style fiscal meltdown.

JURY OUT

However, economists said the jury was still out on whether he would achieve this goal with his current plans, which rely overwhelmingly on spending cuts rather than tax rises.

"It depends on political will," said Andrew Smith, chief economist at accountancy firm KPMG.

Such determination could not be taken for granted, despite the Conservatives campaigning in May's election on the promise to reduce the budget deficit faster than the Labour government.

When a Conservative administration last had to make cuts in the early 1990s, they ended up balanced roughly equally between spending cuts and tax rises, Smith said.

"That was partly because when push came to shove, it became very difficult to make the spending cuts. Until you see it happening, it's slightly questionable."

The National Institute for Economic and Social Research expressed a similar view on Tuesday.

Cuts are not distributed equally across government. While health and schools spending is largely protected, day-to-day funding for the ministries in charge of police and prisons is due to fall by a quarter.

"It will be interesting to see how the Ministry of Justice will manage a 6 percent a year cut with upward pressure on prison populations," said Jon Sibson, head of public sector at accountants PwC.

Ultimately there was too much political credibility at stake to avoid the 490,000 job cuts that Osborne forecast.

"If people are determined to get headcount down, the machine will do this," Sibson said. "The extent and quality of some services will go down, there is no question."

However, while the government has direct control of the 395 billion pounds of departmental spending this year, it has less influence on the more than 200 billion pounds it spends each year on debt interest and welfare payments.

Welfare costs in particular could balloon if official forecasts for growth of around 2.7 percent over the next four years prove too optimistic — whether due to an underestimate of the impact of the spending cuts or because of a global slowdown.

"The resumption of robust growth is crucial to the deficit reduction arithmetic. But the Chancellor is making some rather heroic assumptions," said KPMG's Smith.

"Households may continue to save and pay down debt rather than spend, businesses may remain reluctant to invest and export performance could suffer from a lackluster global recovery."

"PAPER CUT" OR "AMPUTATION"?

Economists polled by Reuters in September — when the scale of the fiscal tightening was clear if not its precise make up — forecast Britain's economy will grow by 1.6 percent this year and by 1.9 percent in 2011.

The CBI and the British Chambers of Commerce said reductions in infrastructure investment were less severe than feared and that tackling the deficit was a top priority.

Others were much more pessimistic.

PwC forecast that a total of 943,000 jobs in the public and private sectors will go by 2014/15 because of the spending cuts, which will damage private sector suppliers too.

This is equivalent to 3.4 percent of jobs nationwide, but regions more reliant on government money such as Northern Ireland and Wales may suffer job losses of 5.2 percent and 4.3 percent respectively.

The worst hit sector is likely to be construction, where PwC forecasts a 5.1 percent loss of output due to a reduction in government capital spending. Business services will be the next biggest victim, with output taking a 3.9 percent knock.

Regardless of these figures, Osborne is likely to draw comfort from the most important audience for his spending review — the ratings agencies whose threats to downgrade Britain's AAA credit grade is driving the rapid pace of deficit reduction.

"Today's Spending Review ... enhances the credibility of the deficit reduction plan by detailing the spending priorities and measures necessary to stabilize UK public finances and debt, and secure the UK's 'AAA' status," concluded David Riley, head of sovereign ratings at Fitch.

© 2014 Thomson/Reuters. All rights reserved.

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