Thursday, October 21, 2010

The UK's Comprehensive Spending Review: Are We All in It Together?

The British Chancellor of the Exchequer, George Osborne, submitted his Comprehensive Spending Review (CSR) to the House of Commons yesterday. All parties agree that the cuts announced will be painful and implemented swiftly.

Disagreement is found in the approach and the CSR's expected effects.

The coalition Government (consisting of the Conservatives with Liberal Democrats) claim that while the cuts will be painful, they will only be painful in the short-term. Their argument is that these cuts are necessary to get the country's financial house in order. Such a move will stimulate the economy and lead to new job growth that will ease the pain in the longer-term and we will all benefit substantially over the long run.

The opposition Labour Party disagrees. They claim the cuts go too far and the pain will be felt immediately and damage the country's economic recovery. We can get our financial house in order, but we should do so more gradually in a more equal split between cuts and tax rises. Job growth will be easier to maintain and unemployment kept to a minimum.

Which side has it right? Yesterday, we reported that Nobel Prize winners in Economics were coming out in favour of Labour's approach, including the latest winner (a British academic as well). The Government's spending cuts were likened to another footnote in support of a well known economic truism that this approach will fail.

Investors do not seem convinced yet either. The FTSE ended the day about where it began and today it dropped slightly shortly after opening. What to make of this? Well, if the FTSE were to slowly drop or remain standing relatively still, then it would seem markets are not substantially energized by the Government's major cut programme designed, well, to energize the markets. If anything, current FTSE movements suggest some anxiety and genuine division on whether these spending cuts will have the outcome that the Government is convinced will happen. The case for cuts -- whatever one's stance on Labour's alternative plans -- is far more controversial than the Government seems willing to own up to.

There is also a genuine concern about how much we are "all in it together" (the new Government mantra). For example, George Osborne said: "Those with the broadest shoulders should bear the greatest burden. Those with the most should pay the most, including our banks". There is a question about the accuracy of this statement in real terms and we will no doubt have independent verification of this claim shortly. Nevertheless, it remains doubtful that the top 10% will pay a greater share of their wealth than those in the bottom 10%. Thus, it may be that those with the most wealth will pay the most £'s between them, but such sums will have a much less effect on their standards of living because this would amount to a lesser share of their wealth than for those less fortunate. In fact, the cuts announced yesterday will have the greatest effect on the least fortunate.

There are also real concerns about the effect on women. Women make up a majority of public sector workers and many women are in positions that may be real targets of the cuts of 490,000 jobs in this sector. Add this to the end of child benefit for many people (paid directly to mothers) and an extra 6 years added to the pension age for women and the CSR turns out to be a deal that may hit women -- and women of all backgrounds -- hardest. This should have been avoidable.

This is yet another example of the major gamble and roll of the dice from Osborne. Suppose this plan were to fail. Osborne would remain the new darling of the Conservatives for trying to usher in major cuts to the welfare system and the size of the state.

The real gamble is being played by the Liberal Democrats. Their position is akin to someone betting on a horse their friend recommends over their first choice. The Liberal Democrats ran a campaign just a few months ago espousing the dangers of the cuts they now support. They've signed up to a plan that is more "blue" than "yellow" for a particular reason. If this works, then the party's future may be bright. But if this fails, then the Liberal Democrats have not only put at risk the livelihoods of the country, but also the future of their party.

A price worth paying? Check back next year.

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