Osborne’s Ambition
Ross McKibbin
The chancellor's Autumn Statement is as political and obscure as we might expect. A bit of spending here and a bit of cutting there. A tilt at the rich and corporations which, except for the change to stamp duty, won’t do much. The ‘banding’ of stamp duty is a kind of mansion tax which in principle would be desirable, if it didn't mean that the government has yet another reason to ration housing. (More houses means cheaper houses, which means a lower return on stamp duty.)
The heart of the statement is, as ever, the ‘deficit’, which is now pretty much as it was in 2010. George Osborne suggested that in order to eliminate it there would have to be further big (unspecified) cuts in welfare, which could, it is said, return government spending to 1930s levels. It might be possible to do that but at a huge cost in political and economic stability.
The Great Recession of 2008 did not become the Great Depression of 2009 precisely because the contemporary welfare state props up government spending and private consumption by ensuring that living standards don’t collapse completely. As real incomes fall, as they have done consistently under the present government, the stabilisers (housing benefit, child benefit, tax credits etc) take up the slack. To fund them, the government has to borrow – especially as it refuses to consider any serious (or obvious) tax increases. And it is able to do so because the markets have shown no alarm at the deficit and it has never been cheaper for governments to borrow. The deflationary effects of spending cuts (falling living standards, for instance) are matched by rises in welfare spending. It is not that the chancellor has been secretly generous, although there have been politically prompted handouts; it is that we still live in a fundamentally Keynesian state.
It is this state that Osborne would like to be rid of. To do so he starts with two advantages: voters' persistent belief that their finances are better managed by the Tories, and the popularity of welfare cuts. But he faces two obstacles: the only popular welfare cuts are cuts to other people’s welfare, and the cuts necessary to achieve Osborne’s ambition would mean cuts to everybody’s welfare – a quite different political calculation, especially as people come to realise how dependent they are on state spending. Destroying the Keynesian state would also destroy the political settlement that has largely been in place since the Second World War. The economic and political consequences of its destruction, as even Margaret Thatcher recognised, could be completely unmanageable. Unfortunately, it is a risk Osborne may be prepared to take.
Comments
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6 December 2014
at
6:27pm
SpinningHugo
says:
The deficit was 11.4% of GDP in 2010. It is now 5.8% of GDP. So, not quite "the same", eh Ross?
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8 December 2014
at
3:27pm
Alan Benfield
says:
@
SpinningHugo
Well, true, but still not the zero Osborne predicted by now, eh, Hugo?
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9 December 2014
at
11:34am
mototom
says:
@
SpinningHugo
I don't remember the government in 2010 ever expressing the deficit as a proportion of GDP - we wouldn't have been frightened enough.
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10 December 2014
at
4:24pm
Doomlord
says:
@
SpinningHugo
Remind me, what's happened to the national debt during that time?
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8 December 2014
at
10:37am
Simon Wood
says:
All the same, from fat banks to food bank.
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12 December 2014
at
9:32am
streetsj
says:
I know I'm talking to myself as this was posted over a week ago but I can't let it pass.
Read moreI think Ross's point here is more that 'austerity' is having some unfortunate and hidden consequences: as incomes decline in real terms, the state is having to put out more 'welfare', leading to more borrowing (and a higher deficit) than George expected. The only way to cut the deficit this way is even more swingeing austerity, which will probably be just as counter-productive.
And this is the man who is promising (unfunded) tax cuts in the next parliament.
So much for Tory economic competence...
"The ‘banding’ of stamp duty is a kind of mansion tax which in principle would be desirable, if it didn’t mean that the government has yet another reason to ration housing. (More houses means cheaper houses, which means a lower return on stamp duty.)"
That is the weirdest form of anti-government conspiracy theory yet. The banding was done because the old system creates absurd distortions. It was also probably done as an alternative mansion tax - but "a reason to ration housing" is the most absurd thing I've read in a long time.
Actually stamp duty is a dreadful tax. It only effects people who move which you might do for a variety of reasons very few of which would be desirable to deter by taxation.
In itself it causes distortions - not least the ludicrous basement development in expensive parts of London where it makes more sense to expand downwards than to move to a bigger property. But worst of all is that few people grasp how big the tax actually is. A house will typically be bought with a 75% mortgage, stamp duty at, say, 5% is actually equivalent to 20% of the buyers equity. It's amazing anyone ever moves house at all.