Savvy politics, not so savvy economics

by Ed Bowsher on 20 October 2010  |  17 comments
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Cutting welfare and back-office costs will be popular with many people, but there are downsides.

George Osborne has played a savvy political game today. He’s announced big cuts but a big chunk of them are aimed at government admin costs as well as welfare.  Many voters won’t object to cuts in these areas.

But, in reality, cuts in neither area are pain-free. I don’t doubt that there is waste in the civil service but we do need to be careful. Think of HMRC. Two government bodies were merged, cuts were imposed and guess what? There was a massive cock-up on tax codes which affected millions of people. I fear we may see similar cock-ups elsewhere.

Moving onto welfare, we learned today that a further £7 billion will be cut from welfare spending – on top of the £11 billion cut that was announced in June. I accept that the welfare budget needs to be cut but you’re not going to get all that money from benefit scroungers. I also worry about changes to Employment and Support Allowance which is paid to sick people. What’s more, cuts in housing benefit could force families to move away from places where they can get jobs.

Much will also depend on the terms of the new universal credit. It will be introduced over ten years and replace tax credits and other benefits. It’s a good idea in theory as it should increase incentives to work rather than stay on benefit.

But the devil will be in the detail. Will it improve those incentives by cutting income for people who aren’t working or by increasing income for those who are working?

There are some winners in today’s review though. Families with children on middle and lower incomes won’t lose any child benefit and will gain from an above inflation increase in child tax credit.

Workers in the NHS should also be pleased. No doubt there will be some job cuts, but with a real terms increase in the Health budget, job losses will probably be lower than elsewhere. I also applaud the decision to keep spending on transport infrastructure at a higher level than I expected. Sticking with the Crossrail project in London is especially welcome. That will help long-term economic growth.

Growth

However, in spite of that growth stimulus, I fear that economic growth will be far too sluggish over the next two or three years. The best way to reduce the deficit is to drive economic growth – along with some more modest spending cuts.

I’m still convinced that the coalition is making a big mistake in introducing such savage cuts. Either we’ll go back into recession or we’ll be ‘saved’ by further money creation via Quantitative Easing. That brings its own dangers which I’ll look at in another blog.

It’s not a good day for our economy. Savvy politics but not savvy economics.