David Prosser: Forget the progressive posturing: these cuts will feel savage
You cannot cut spending by 20 per cent in a single year without the effects being felt at every level of society, including by those on the lowest incomes
Tuesday 08 June 2010
Tough love? As the Government prepares to deliver its emergency Budget in a fortnight's time, the coalition's senior ministers want you to know that it is going to hurt. Still, it's for your own good and you can trust them to think carefully about where they'll wield the axe.
So, for example, while the Prime Minister's speech yesterday was full of words such as "tough" and "painful", Mr Cameron also said: "This Government will not cut the deficit in a way that hurts those we most need to help."
That message echoed the interviews given by Nick Clegg over the weekend, in which the Deputy Prime Minister insisted the LibDems' presence in the coalition would ensure that austerity measures would be delivered without Eighties-style brutality.
The models for this progressive programme of fiscal retrenchment, we are told, include the Canadian experience of the Nineties. That saw Liberal Prime Minister Jean Chrétien turn a budget deficit of around 9 per cent of GDP in 1994 into budget surpluses within just three years. The Canadians continued running surpluses for many years thereafter, weathered the financial crisis of 2008 much better than other countries and are now seeing much stronger growth than rivals such as Britain.
This was a successful crackdown on indebtedness, in other words. Still, let's not pretend that the fact the budget cuts were made by a left-of-centre government in Canada somehow made them any less painful.
The 40,000 public sector workers who lost their jobs under Mr Chrétien certainly did not see it that way. Nor did those who had to wait considerably longer for treatment for ill-health as Canadian hospitals shed nurses or closed altogether. Parents who watched as average school class sizes rose from 25 to 35 children weren't too chuffed either.
The truth is that you cannot cut government spending by 20 per cent in a single year – as Canada did in 1995 – without the effects being felt at every level of the society, including by those on the lowest incomes. It may well be that such cuts are necessary for the long-term good – that is a different debate – but to pretend, somehow, that this will be a progressive deficit reduction programme, focused only on public sector waste while it protects the needy is just not credible.
Bear in mind too a couple of lessons from the Canadian case study that economists there say were crucial factors in a successful outcome. The first is that Mr Chrétien made it clear nothing was out of bounds – that cuts would be made in every area of government spending. This was important both on the grounds of perceptions of fairness, but also because protecting some departments would have made the cuts imposed on others intolerably large.
By contrast, the British Government is determined to ring-fence large chunks of health and education spending, as well as the aid budget. We can understand such an approach, but there is no denying it will make the overall task all the more difficult.
The second point is that the Canadians won public support for their programme with some home truths about the need for austerity and real honesty about the detail. You can see echoes of the former in Mr Cameron's speech yesterday, but the accompanying mood music smacks of soft-soap.
The Prime Minister may not intend to "hurt those we most need to help", but he is likely to do so. In any case, huge numbers of people count themselves within this definition – witness the rebellion over capital gains tax increases – so the goal is self-defeating.
Prudential executives deserve a reprieve
It was like the good old days of the credit crisis at Prudential's annual general meeting yesterday. Financial services executives queuing up to say sorry to shareholders for having screwed up. Investors hurling abuse at the board. And not a resignation in sight.
The question now is whether their public apology is enough to save the skins of Tidjane Thiam and Harvey McGrath, the Prudential chief executive and chairman who wasted £450m of the insurer's money botching the takeover of AIG's Asian operation AIA.
Barring further revelations or disasters, the answer looks ever more likely to be yes, despite the bloody mood at the AGM. Neither man was up for election yesterday, but investors looking for scalps might have been expected to vote down the board appointment of finance director Nic Nicandrou, or even to stage a revolt over Pru's remuneration policies. In fact, shareholders did neither in any great number.
The explanation for the willingness of many investors to give Messrs Thiam and McGrath another chance is that this episode has been a failure of execution, rather than a strategic blunder.
The rationale for buying AIG's Asian assets was plain in the trading statement issued by Pru at the AGM. Performance has been strong across the board – to the credit of the company's leadership in itself – but nowhere is the insurer growing more quickly than in Asia. AIA would have given the insurer an opportunity to add massive scale overnight in this market. Building the business organically will no doubt continue to produce results – Mr Thiam now intends to redouble efforts in the Far East – but growth will not accelerate in the way it might have done.
This was the right acquisition, but at the wrong price (for which, by the way, Pru's advisers must take a deal of blame). That makes the Asian misadventure survivable for the management team, despite the price tag failure has carried.
The timing of the AGM has also helped. That it took place only a few days after the AIA deal collapsed ensured Pru's executives got a rough ride. But it also gave investors an early opportunity to vent their spleen, rather than raging privately for months, and, crucially, Messrs Thiam and McGrath got a chance to apologise. That done, let's move on.
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