Duncan’s Economic Blog

Osborne to cut more slowly?

Posted in Uncategorized by duncanseconomicblog on October 7, 2010

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.

8 Responses

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  1. vimothy said, on October 7, 2010 at 9:32 am

    I blame Nassim Taleb.

  2. Liam Murray said, on October 7, 2010 at 9:48 am

    Astute analysis and the political angle hadn’t occurred to me.

    “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”

    And surely it’s even more recent than ‘one [Labour] argued for 6 months ago’; I know his framing was ‘halving in 4 years is a start’ but my understanding is that Ed M essentially backs that Darling plan albeit with more focus on growth etc. Is anyone suggesting Ed M is in the Ed B place of disowning the 4 year plan entirely?

    Depending on how much traction that conspiracy angle gets it could impact the decisions around the shadow cabinet appointments, and in the direction of strengthening Balls hand if there’s a desire to keep the dividing lines clear. And didn’t Ed B work for the FT once….!?

  3. Tom said, on October 7, 2010 at 12:15 pm

    “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?”

    It could certainly be tricky for Labour, but surely he won’t do that – it would be immensely damaging for the government, even this far out from a general election. Everything they said before the election, and since, about Labour addiction to spending, about deficit denial, would be gone in a stroke. They would have capitulated to a deficit reduction plan they’ve cast as irresponsible, and they would be following rather than setting the agenda. The Lib Dems would have changed their minds twice over – first to support a quicker reduction, and then to return to their original position.

    And if they do all that but focus the cuts on welfare, then, no longer able to frame the argument as “making tough decisions” v “deficit denial”, the focus will be on the choices of what to cut, and it would look inescapably like old-fashioned Tories taking money away from the poor. A nice simple message from Labour: “The Tories now accept that we would have dealt with the deficit responsibly and they’re copying our plans, but we would have protected the poor, while the Tories are protecting the wealthy”.

    Of course, if they focus the cuts on public sector workers – cutting/freezing pay, redundancies especially at local council level, slashing pension provision, etc – then that becomes much harder for Labour. But I don’t think there’s enough money there for that to be a workable strategy anyway.

    • duncanseconomicblog said, on October 7, 2010 at 2:39 pm

      Tom,

      I hope you’re right.

      He won’t match Darling exactly, but come very close over he next 3 years or so (11/12, 12/13, even 13/14).

      Close enought to cause problems anyway.

      • Tom said, on October 9, 2010 at 10:07 am

        Another thought about this just struckme this morning. You say it would be bad for Labour to “go into the next election arguing for higher taxation to fund greater welfare payments” – but they wouldn’t actually need to. They could attack the cuts to welfare now, without necessarily pledging to reverse them. The Tories and Lib Dems both did it over the abolition of the 10p rate of tax. Labour can use welfare cuts to simply make the Tories look heartless.

        Of course, from a point of view of good policy, I’d like Labour to win the next election on a platform of reversing Tory cuts to welfare, and even increasing redistribution. But it’s not a position that *has* to follow from opposing the cuts now.

  4. Will M said, on October 8, 2010 at 9:34 am

    My initial response is that actually the Labour Party need to be avoiding critiquing the budget’s detail, and instead need to be focussing on *how* they talk about the budget – i.e. sounding more working class than George Osbourne. It’s one reason why I suggested AJ for Shadow Chancellor. This, combined with talking about the government’s failure to create new jobs, would have been a recipe for success.

    But on balance, and looking now at the Shadow Cabinet, Labour are at risk of looking (if you pardon the expression) like novices. As such, the Party does need to be able to describe policy in detail, make Osbourne look at sea, and otherwise compete on competence as well as heart. In addition, to bring in ideas like Don P’s latest suggestions, would also require policy heft up front to be able to make the case convincingly.

    As such, it’s got to be Ed B or Yvonne for Shadow Chancellor. None of the other suggestions I’ve seen make any sense given what’s needed.

    • Will M said, on October 8, 2010 at 12:21 pm

      Just to follow up on this, I do think AJ has many strengths, and as Shadow Chancellor, *how* he says whatever he’s going to say is going to make it difficult for the Tories to keep getting their message through.

      However, for the medium to long term, what is said will start to matter, and over time AJ may start looking like a bad choice.

  5. james said, on October 9, 2010 at 1:32 pm

    If it is a case that they can defend themselves with this line in macroeconomic terms is it not possible to deal with it in micro economic terms i.e. say for all the vaulted attempts at reorganising the NHS and perhaps DWP they haven’t managed to bring down the public spending budget and just caused irrevocable damage to front line services by pursuing wrong minded economic policies overly reliant on the bankrupt deregulate at all costs ideology that got us into this mess.
    Stress their inability to bring the budget to below that of the labour plan and as a result of incompetence.


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