Uncomfortable Kingdom

It always amazed me, even in the days of black-and-white television, that almost as soon as the Budget was announced, the BBC would be interviewing a poor soul who was about to suffer Dickensian poverty in its wake. Less usual after the present Government's Spending Review announced to Parliament by Chancellor of the Exchequer, George Osborne on Wednesday, 20 October 2010, was the media being quite so spoilt for victim choice.

Over the next few days umpteen of those who saw themselves as disadvantaged were more than willing, as individuals or representatives of councils, the unions and the poor to mention but three groups, to step forward and speak up for the injured parties, after the Coalition Government outlined the means by which Britain's deficit is to be scaled down. In case anyone has forgotten, the UK's deficit of some £156 billion is 10 per cent of GDP.

No doubt "leaks" beforehand had helped the BBC in times past, however in this instance the broad outline of the Spending Review had percolated out from Government sources for weeks, if not months. The Financial Times' leader "Osborne heads into the unknown" on Thursday 21 October 2010, concluded: "Markets reacted calmly: the pound and FTSE 100 were stable while the gilts markets remained largely unmoved."

For gilts and money markets it was simply a tick-box exercise checking that the Coalition Government was holding its nerve, although by the weekend some newspapers were reporting more than one American foreign exchange dealer predicting that Sterling would fall to $1.40, in the near to medium term.

Obviously many in the USA either doubt the Coalition's ability to pull this austerity measure off or agree with Labour that the cuts are too deep, too soon. Ghastly as the figures are and at odds with the manner in which America is tackling its recession, I just hope that these critics are remembering that the reductions are over a five-year time span. Whilst admitting that much can go wrong between now and 2015, Labour's own policy under Alistair Darling's proposals, would probably only have added another couple of years - and that's if the money and gilts markets were to take no issue. As it is, interest on Britain's National Debt will rise from a current £43 billion to £63 billion by 2015.

For many of the public at large it either confirmed their worst fears or came as a relief that some of the wilder projections of an average 25 per cent or 40 per cent cut to public spending proved unfounded. Possibly taking account of this latter group and with opinion polls showing that at least 60 per cent of the electorate want the deficit to be tackled with determination, Mr Osborne saw the opportunity to slip in an extra sting in the tail by slashing an extra £7 billion to his proposal back in June from the Welfare budget.

Adding a little insult to injury, Mr Osborne told the House that he had taken note and learned from previous Chancellor, Alistair Darling's proposed budget cuts of an average 20 per cent reduction in departmental spending and was pleased to announce that his cuts would average 19 per cent. That average, it must be remembered, includes a Health budget protected from cuts, a real rise to the budget for International Development and a somewhat humble 0.1 per cent rise per annum, to the schools budget for those between five and sixteen years old. Cuts in Defence of 7.5 per cent look positively generous when compared to a drop of nearly nine times that to the Communities budget. (Grants to the local authorities themselves, will however only be cut by 27 per cent).

This package will see the UK's deficit fall by £81 billion and is designed to eliminate the country's £109 billion structural deficit by 2015. The Government frankly admitted that there would be a human cost as well. Using figures supplied by the independent Office for Budget Responsibility, Mr Osborne said that he expected the loss of about 490,000 government jobs. This hopefully includes 100,000 job losses that representatives of local authorities in England and Wales expect to see over the next four to five years.

The "Celtic Fringe" of Scotland, Northern Ireland and Wales, will have the dubious honour of deciding within their devolved sectors of responsibility where further axes will impact on jobs due to reductions in their block grants from Westminster. In each of these devolved regions, government employment, central and local, play a much bigger part in the economy than is the case in England.

Making life harder for the Chancellor and reducing his options, was the promise to ring fence the Health and International Development budgets. Labour whilst in power, increased the Health budget far in excess of the country's normal economic growth rate and only decided that the system needed a measure of reform in their last year or so in office. Accounting for about one fifth of all government spending and employing close to 1.5 million, The Economist writes in its 23 October 2010 leader "Ouch" that such a decision was taken: "the NHS budget grew extravagantly under the previous Labour government and was as ripe as any for pruning" and by so doing "would have eased the pressure on other parts of the budget." An opportunity for another time? No doubt the Conservatives had in mind the love the British public have for the "sacred cow" that is the NHS.

A further opportunity missed to ease the burden on other departments was to means test universal benefits to the elderly - winter fuel allowances, free bus passes, free tv licences. A marginal saving no doubt as all these perks cost the British taxpayer about £4 billion a year, but not all pensioners are poor.

The real gamble for the Chancellor is whether or not the private sector can come riding to the rescue and fill those half million redundancies expected to be the fall-out from his austerity measures. Richard Lambert in the Telegraph on 24 October 2010 states that: "in the decade up to the crunch the private sector created on average more than 200,000 jobs a year..." and with many bigger companies in particular being cash rich and interest rates most unlikely to rise soon, the conditions are ideal "for a much needed rise in business investment."

Cash rich or not, too many UK companies, large and small still appear to view the future with a degree of excessive caution, not helped by an equally cautious banking industry. Consumers are more careful as well and are paying off debt - seen as a virtue but a short time ago! There are positive signs, but it will probably take longer than Mr Osborne and company would like.

Some communities will be affected by the cuts in government jobs, central and local, much harder than others. The Morning Star - no plaudits for the Chancellor - in an article on "Austerity Britain" on 20 October 2010, revealed that Castle Morpeth in Northumberland had the highest public sector workforce in the country at 52.9 per cent. Figures from the Morning Star and Guardian show that Middlesborough, Liverpool, Swansea and Newcastle upon Tyne relied on the public sector for close on 40 per cent of their labour force. It's likely to be a long winter!