Osborne to cut more slowly?
Potentially very big news. The FT is reporting that the Coalition is considering slowing the pace of deficit reduction.
The Treasury is working on plans to “reprofile” spending cuts next April, spreading the pain of deficit reduction more evenly over the next few years, senior Whitehall officials have told the Financial Times.
Confronted with the difficulties of quickly cutting spending – including financial penalties for breaking contracts and redundancy costs – ministers have been forced to consider delaying some of the big savings until later in this parliament.
As Left Foot Forward explains:
Speculation is growing that the Coalition government is about to slow the timetable for deficit reduction. Whitehall sources have briefed the Financial Times amid warnings from the World Bank and concerns from Cameron and Osborne’s Cabinet colleagues.
I, like many others (notably, in the political arena, Ed Balls) have repeatedly warned that Osborne’s planned pace of deficit reduction risks at worst a double dip and at best more sluggish growth than would have been the case otherwise.
The Cameron/Osborne/Clegg “there is no alternative” line has been based around a claim that without rapid action now the bond markets might panic, the UK might get downgraded and borrowing costs would spiral.
Interestingly enough, the FT pieces quotes Ben Broadbent of GS making the opposite case.
Ben Broadbent of Goldman Sachs said that any move to delay spending cuts was unlikely to make “an enormous difference” to the economy or to Britain’s credit rating.
“If people were clear about the reasons for any delay [to spending cuts] rather than suspecting a political wobble … I don’t think [investors] would change their mind about the risk premium on gilts,” he said.
If the Treasury going to slow the pace of deficit reduction (and we should remember none of this is official yet) it’s certainly somehing I would welcoem and something that is right for the UK.
But the politics of it are potentially explosive.
The FT speculates that:
Labour politicians would surely accuse the government of backsliding and the political pain of the cuts would be pushed close to the next general election.
Both of these factors are certainly true – if Osborne slows the pace there will be, rightly, a lot of Labour spokespeople shouting “we told you so” and more the pain will be moved closer to a 2015 election.
But, but, but…
Where does this leave Labour’s response to the CSR in two weeks time?
Surely the really salient political point here is that Osborne is about to throw a handgrenade right into the middle of Labour’s approach.
If he were to slow the pace so that for 2011/12, 2012/13 and potentially 2013/14 he essentially matched the Darling 4 year plan, where would that leave Labour?
Forced either argue for a longer timetable than we one we argued for 6 months ago or forced into backing the overall size of the Osborne plan. It would also neatly neutralise the “risking the recovery” attack as Osborne replied “I’m matching your plans”.
Take this analysis a step further. What if Osborne matches the pace of the Darling plan, but does more of it (as seems likely) through cuts to welfare spending than Labour planned? How do Labour respond? By arguing for higher taxes or more cuts to public services to preserve the existng system?
Osborne’s dream scenario is one where Labour go into the next election arguing for higher taxation to fund greater welfare payments. This takes him one step closer to achieving it.
We need an agreement on a watertight deficit plan and we need ASAP.