Belfast Telegraph

Friday 28 November 2014

Spending review: So, are we really all in this together?

Sean O'Grady assesses whether the cuts are fair to all sections of society – and whether George Osborne's plan will work

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Are we in this together?



Yes and no. The Government's own charts of the redistributive effects of the spending review shows that it hits the poorest hardest, if only because public spending tends to be an engine for shifting wealth and income from those who don't use public services very much to those who depend on it sometimes entirely for their income, home, schooling for their children and treatment for their (disproportionately poor) health. In that context it is perhaps surprising that the public spending review was not more regressive than it has actually turned out to be.



It is also impossible to measure the damage some cuts may make to individuals and families: who can say whether economies in local government will eventually lead to another Victoria Climbie case? And who would attempt to place a cash value on that?



The single biggest regressive policy change announced yesterday will probably turn out to be the virtual abolition of public funding for social housing. The reduction in the Department for Communities' capital budget of around three quarters will reduce spending in this area – already very low by historical standards – to about £2bn, from almost £7bn now. With a reduction of a quarter in their spending, local councils are unlikely to be able to make much of this up, and will be further pressed into painful economies by the cut in the support they get from Whitehall. It will aggravate the cuts already announced in housing benefit and the rise in council housing rents.



Those on council benefit also face a double whammy; a sharp rise in council tax, once the current freeze ends; and a likely 10 per cent or more cut in their council tax benefit, which can be worth thousands for those on modest incomes. What's more, different councils will interpret their new flexibility to run council tax benefit in different ways, creating a new "postcode" lottery. Not many would view that as "fair".



So what were the fairest measures?



There are certainly moves that the Government plans that will hit richer families more than poorer families, such as the changes in university funding, taking those on less than £10,000 out of income tax and the withdrawal of child benefit for the better off. There are also other, more stealthy, hits to the middle classes and the rich; the limits on pension tax relief announced last week, for example, will echo down the years, while the likely increase in commuter rail fares in the South of England will also tend to disproportionately affect the most well-heeled corner of the kingdom.



The pupil premium ought to provide some incentive to schools to assist the least advantaged to make the most of their schooling and improve their life chances. Reducing interest on the national debt, meanwhile, will reduce the amount in tax that hardworking families pay out to the (usually richer and often foreign) holders of government bonds in interest.



Many of the cuts cannot be said to be fair or unfair, except by those immediate affected. After all, the cancellation of the Ark Royal could be said to hit the rich and poor .



So why is public spending still going up?



Indeed it is. In cash terms it will rise – even after George Osborne's axe has been at work – from £697bn this year to £740bn in 2014, a 6 per cent increase. However, that doesn't take account of inflation, and it also includes some "cuckoos in the nest" that eat up cash while providing no benefit to "front line" services. The cost of nuclear decommissioning, for example, is set to soar, as are the costs of supporting public sector pensions and the interest bill on the national debt. These three together account for hundreds of billions in extra spending, and have intensified the squeeze on other departments.



Similarly, the retirement of the baby boomers over the next few years would have inflated the social security budget whatever else happened, and the Government's decision to link the basic pension to average earnings has turbo-charged that effect. The ageing population and the rapidly rising cost of advanced drugs and medical technology will make those using and working in the NHS feel that they are facing severe cuts even when funding is going up in line with shop inflation. In this way we will be repeat the experience of the 1980s, when modest real terms rises that didn't keep pace with medical price inflation and the growing demands on the NHS were greeted with a chorus of "Tory cuts".



Will it work?



Ireland infamously found that efforts to reduce a spiralling budget deficit can backfire if they take so much spending power out of the economy that it lurches back into recession. In these circumstances unemployment tends to rise and tax revenues collapse once again, and the budget deficit ends up even bigger. There is also the nasty possibility that a dip will hit the banks, exploding their bad debts and triggering another round of bank bailouts – transferring money from hard-pressed taxpayers to well-paid bankers and shareholders.

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