Cameron more daring than Blair

21.10.10 Publication:

It is an extraordinary gamble: cutting 500,000 public-sector jobs, in a programme of dramatic fiscal retrenchment, with ministries’ budgets being cut by an average of nearly 20% over four years. Moreover, it is a gamble made with a daring and determination that few expected when David Cameron’s Conservative Party failed to win an outright majority in the British general election in May and had to form a coalition with the small Liberal Democrat party, the country’s first coalition government for 65 years. Then, it was assumed that the compromises necessary in a coalition would make the government cautious. Yet what has happened is the opposite: this government is being far more bold than Tony Blair’s Labour Party was in 1997, even though Blair had won a huge majority.

That is an internal comparison: bold Cameron against timid Blair. But there is also an external comparison: deep British cuts, so far without any substantial protests or strikes, while France is paralysed on a daily basis, with its supplies of fuel running out, by strikes and demonstrations against a seemingly minor adjustment in the retirement age. The comparison might well please some traditional Englishmen, proud of our stoic, “stiff upper lip” approach to pain and sacrifice, rather than what they see as the over-excitable and selfish approach in France. But the important question is not about the stereotype: it is about whether this British gamble will really succeed, and indeed whether it will really be carried out.

Certainly, George Osborne, the 39-year-old Chancellor of the Exchequer (ie, finance minister), sounds determined, and he has the support not only of his prime minister, David Cameron, but also of the leader of the Liberal Democrats, Nick Clegg. The boldness of this coalition government arises, firstly, from the fact that they did win more than 60% of the votes in the May election, but also from the belief that thanks to the 2006-09 financial crisis and recession, budgetary pain is inevitable so it would be better to get the bad news over with early on—while it is still possible to blame the pain on the previous Labour government.

There is plainly another factor at work, however, especially in the minds of the Conservative Party. It is that the general atmosphere of economic crisis, of the need for austerity and belt-tightening, offers a special opportunity for structural reform of the whole public sector, and notably for social welfare payments. Under the cloak of retrenchment, fundamental changes can be made, especially ones that reduce or abolish welfare payments that are going even to people who are far from poor. Such payments are a legacy of the post-1945 belief in Britain that to get widespread support for a welfare state, everyone had to get some benefit from it, even if they were rich. Even Margaret Thatcher did not try to attack that belief during her dramatic period in office in the 1980s.

So will it work, and will it really be carried out? The first of those questions is partly economic and partly political. The economic argument for these huge cuts is principally that the big rise in Britain’s public debt since 2006 is dangerous, and that if it is left high—as in Italy—then investors in British government bonds might force interest rates much higher, causing a new recession. Yet it is not clear that this is true—or at least, not true enough to require such dramatic cuts. Britain’s public debt is 80% of GDP, about the same as Germany’s and much smaller than Italy’s 120%. The pound sterling has depreciated by nearly 20% against the dollar and the euro since 2007, but over the past year it has actually revived somewhat, at least against the dollar. There is no sign of a solvency crisis.

So an alternative programme of gentler retrenchment could have been adopted—perhaps with a pledge to make it tougher as and when the economy became stronger. It would have involved a risk—that investors changed their minds, and started selling British bonds as they did with Greece. But the current policy also involves a risk: that cuts of this severity will themselves cause a new recession. And if unemployment rises, overall, as a result, then that will itself add to public spending, potentially making the government miss its budget targets in any case.

The political argument, though, is what has really won the day: it is that the Labour opposition cannot truly criticize this plan powerfully or convincingly, since the cuts are only a few percentage points tougher than the plan the Labour government had promised before the election. So the opportunity for structural reform can be grabbed, without direct party-political risk.

The economic risk can, moreover, be dealt with, over the course of the next few years. If the British economy does falter, then monetary policy can be made more expansionary—a benefit of being outside the euro—and in fact the fiscal retrenchment could be eased, either by delaying some of the spending cuts or, more likely, by cutting taxes. That indeed, is where the economic doubt that this programme will really be fully carried out arises: Osborne’s fiscal car does have a reverse gear, and if necessary he can use it.

Behind all the British stoicism, though, there is also a political doubt. The fact that there have not been strikes or protests so far does not mean that none will occur. Crucially, the government is not cutting either health-care spending or the main funding for education, both of which would be deeply unpopular. It hopes that the fact that the pain will be widely shared, including by richer families, will make protests more restrained. But that is far from certain. And it may well be that the biggest gamble of all in this programme is the cut in the budget for the police force by 4% per year. Supposedly, this will remove “bureaucracy” rather than cutting police manpower, but the police themselves argue that this is an illusion.

Law and order is always a sensitive issue. If the police start to protest, even to threaten strikes, then the general, rather extraordinary level of support for Osborne’s programme, or at least acceptance of it, could begin to collapse. The gamble is a huge one. And the game has only just begun.