Osborne’s Dangerous Political Gamble
The politics of this are quite smart – match (broadly) Labour’s departmental cuts, cut welfare spending and then attack Labour from now until 2015 as the Party that wants to increase your taxes to spend more on welfare.
Now the implementation of this neat little political stratagem will undoubtedly be more difficult in the real world than it sounds on paper. As a simple rule of thumb, try to remember that cutting £1bn from welfare means taking £1,000 a year from a million people. Then think about what cutting £15bn plus actually means – taking £1,000 from 15 million people?
Practical difficulties aside, the economics of this are horrible.
I wrote a post back in August on fiscal multipliers.
One thing leaps out – no matter which set of numbers one uses (IMF, OBR, Moodys) capital spending and transfers to those most in need (AME Welfare in the UK, food stamps, unemployment insurance, etc in the States) – have the highest multipliers.
In other words cutting welfare spending is likely to be especially damaging to short term demand as those on low incomes have the highest propensity to consume and are more likely to spend rather than save their incomes.
Osborne, in an effort to make political difficulties for the Labour Party, is about to embark on a path that is even more economically dangerous than his original course.