There has been so much commentary on the Budget that it seemed pointless to add to the noise already generated. But there is a truism about Budgets – the first day’s assessment is almost pointless, it is the second day that really matters, when all of the experts have had a good go over the figures and the Chancellor’s initial spin has been discounted. And the best place to turn is usually Paul Mason on Channel 4 and the Institute of Fiscal Studies.
It is become clearer as the Election approaches that the key moment in George Osborne’s Chancellorship was when he realised that his extremely tight fiscal policy was stopping the economy from recovering, and he relaxed his demands for cuts. By reverting to what was in effect Alastair Darling’s deficit reduction plan, set out before the 2010 Election, Osborne abandoned his own suicidal plan to remove the deficit entirely by 2015. Instead he has achieved a reduction of about one-third in money terms, dressing the whole thing up as a cut in half through a re-presentation of the statistics (talking about the deficit as a share of growing GDP).
Having got away with it once, he is now trying to play the same trick again. By presenting huge cuts in the first 2-3 years of the new Parliament, and by selling off nationalised banking assets (probably cheaply) earlier, Osborne can make it look like the deficit reduction objective is being achieved more quickly, that total national debt is starting to come down, and that the good times will then return. Jam tomorrow! It has nothing to do with economics, it is entirely a matter of political calculation.
The IFS point out that the cuts now proposed in the next 2 years are so large as to be unachievable – 5% in each year, twice the size of any cuts achieved in any one year of the 2010-2015 Parliament. Once you have taken into account the ‘protected’ departments, the cuts required in the remainder – including the Tory touchstone department of Defence – are unmanageable in such a short time frame. That is why Ed Balls is now speculating that Osborne would have to raise VAT again or remove the protection to departments like Health.
After the first 2 years, Osborne’s rollercoaster, as the Office for Budget Responsibility dubbed it, comes into play. It was only in December that Osborne set out a projection for a budget surplus of £23 billion for 2019-20. He has now revised that to a mere £7 billion – as the IFS notes, this is the biggest single change in the budget, and it transforms the prospects for public spending. Paul Johnson of the IFS called this ‘a pretty remarkable’ ‘apparent change in economic philosophy’. Paul Mason described it this way: ‘George Osborne simply blinked: he looked at the scale of austerity he promised in December and realised it wasn’t politically going to be that popular’.
Even now Osborne’s figures rely heavily on the long-promised but never specified £12 billion cut in welfare spending. Even Duncan Smith at his most rabid will struggle to achieve that without touching pensioner benefits. That’s why IFS have challenged the Tories to put forward their welfare plans before rather than after the Election.
It is much more rational, and far less disruptive, to adopt a more gradual profile to end up in the same place, and to mix the burden of deficit reduction with tax rises and not rely entirely on public spending cuts as the Tories will do. A new Labour Government from May 7 would inherit a very bad year of cuts already underway, but could then take a much more sensible and planned approach to public spending in 2016.
The IFS also point to other factors that make the outlook for public spending more benign – notably inflation and the cost of debt interest. And the value of a new approach was reinforced by Stephanie Flanders, once of the BBC but now at JP Morgan, speaking on the Daily Politics, when she said that although the deficit figures look big they are of little interest to international financiers because their focus is on the prospects for growth. Growth is the mechanism that reduces the deficit without swingeing cuts – a lesson Osborne has partially but not fully learned.
The economic and political opportunity for Labour lies in the IFS conclusion that ‘our latest estimates suggest that Labour would be able to meet its fiscal targets with no cuts at all after 2015-16’. And going one step further on Channel 4 News, the aptly-named Soumaya Keynes of IFS said ‘If you take Labour’s plans, they might not need to cut spending at all by departments, in fact they could maybe increase departments spending by about £9 billion.’ Paul Mason summarised: ‘Ed Balls could, if he wished, do no cuts at all over the next 5 years and we could end up with Labour spending more over the next parliament; in other words, austerity ends on May 7th. This is a new situation created by George Osborne.’
It is not too late for Labour to make a game-changing proposal which fits the emerging public mood against austerity and the new public understanding that it damages the wider economy if the Government stops spending, especially on investment. It will surprise no-one to learn that I would favour a plan to increase housing investment back to 2010 levels by 2016 (it will take some time to gear up anyway).
A big increase in grant for social rented homes would have a multiplier effect through the supply chain. Grant at 40% (rather than the current less than 20%) would generate matching private borrowing by housing associations, increase construction output and employment, generate tax revenues, and hold out the prospect of permanent year-on-year savings in housing benefit as the ‘benefits to bricks’ effect of lower rents works through. The preparatory year could be spent setting up public sector sites and challenging private developers to ‘use it or lose it’. A return to a robust s106 planning gain policy would maximise the benefit on mixed development sites.
If IFS are right, we would get all of these benefits without preventing Labour from meeting its aim to balance current spending as early as possible in the next parliament.
Housing has been rising up the political agenda. The Tories only have ultimately self-defeating demand-side plans which will eventually work through into prices. These can be left in place for the moment. Instead, Labour could have a bold supply-side policy which breaks through the sterile debate.
In short, social housing can win the Election for Labour.