ANALYSIS:British prime minister David Cameron and his Liberal Democrat ally Nick Clegg have risked all early in the life of their new government
BRITISH CHANCELLOR of the exchequer George Osborne, prior to taking up office, was regarded, often unfairly, as a lightweight by political opponents. But he certainly cannot now be accused of being a man afraid of taking risks.
By the time he sat down in the House of Commons yesterday afternoon, Osborne had outlined the most drastic spending cuts to be seen in the UK in peace time, including some that are potentially incendiary – such as the plan to take £11 billion (€13.3 billion) from the social welfare budget.
David Cameron, Nick Clegg and Osborne have taken a simple gamble: announce severe cutbacks now and then hope that the economy will have recovered by the time the Conservatives and the Liberal Democrats next have to go to the polls.
“This is the unavoidable budget. I am not going to hide hard choices from the British people or bury them in the small print of the budget documents. You’re going to hear them straight from me, here in this speech,” Osborne told a House of Commons packed but for the absence of former Labour prime minister Gordon Brown who decided to spend the day visiting schools in his constituency rather than travel to Westminster.
Peppered with some brighter points, such as increases in the tax thresholds for lower-paid workers, the budget is otherwise filled with dark tidings: an increase in VAT from next January of 2.5 percentage points; a two-year public pay freeze for those earning more than £21,000 per year and promises of curbs to pensions later; and budget cuts of one-quarter in all but a few government departments over the next five years.
Some of the measures, such as the pay freeze and cuts to housing benefits and inflation-linked pension increases, will be immediately unpopular, while the full import of VAT and spending cutbacks will take longer. Nevertheless, the Conservative/Liberal Democrats alliance is heading into its own winter of discontent, if trade union anger last evening is any guide.
Judging by Labour’s reaction in the Commons, it is clear the party coming to terms with life after 13 years in power now believes it has been put back in the political game. It must feel its own sins in office will be soon forgotten, if not forgiven, by a public that will be consumed by the detail of the spending cuts when they are announced later this year, following a line-by-line spending review.
Osborne’s budget speech shows the work of many hands. The Conservatives got their way on higher VAT, which they had always wanted to do despite their coyness on the subject during the election, while the Liberal Democrats can point to the measures to keep the low-paid out of the tax net, along with the protection of the principle of universal benefits – even if they have been frozen.
The Conservatives compromised on capital gains tax. Many MPs wanted cuts to the existing rate, not increases; but Osborne bowed to the Liberal Democrats’ demand for a rise, compromising on bringing it from 20 per cent to 28 per cent – the furthest he could go, he said, without actually leading to a reduction in the total revenue from the tax. But it will be deeply unpopular in many districts, particularly when it impacts on the sale of rental properties and other smaller-scale investments.
Given the dependence on government spending by regions outside of London, the east and southeast of England, the government had to do something to try and bolster economic growth there, though they struggled to make ground when times were good. Nevertheless, new businesses will be exempted from £5,000 worth of national insurance payments for the first 10 workers they employ.
Capital spending will not be cut. Tough reductions were made, said Osborne, during the early 1990s by the Conservatives, though, with the benefit of hindsight, he now judged the actions taken then to be a mistake, since capital spending is valuable both for its economic spin-offs and for the extra growth that can be created from a society equipped with better infrastructure.
There was little sign of the green taxes so favoured by the Liberal Democrats, bar a promise to consult on the effects of moving from a tax on airline passengers to one on aircraft – designed to encouraged airlines to ensure that every seat is full, while Clegg’s left-leaning MPs will bridle at Osborne’s declaration that every person is being asked to contribute according to their means, given the regressive nature of VAT.
Equally, Labour will enjoy pointing out that the Liberal Democrats – who did not want to impose £6 billion worth of cuts in this financial year during the election campaign, arguing that it could threaten a “double-dip recession” – have now signed up for much worse. A party that had grown used to the opportunities offered by opposition politics, even if they lacked the tools of power, is having to grow up very, very fast.
Mark Hennessy is London Editor