Now it's Osborne's turn to join Europe's axemen

'Star chamber' to oversee cuts of £60bn a year and a cull of up to 1 million public-sector jobs are planned. Sean O'Grady reports
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Indy Politics

"Unavoidable", "painful" and "inevitable": the public spending cuts planned by the Government will "affect our whole way of life", David Cameron declared yesterday, as Britain prepares to join the wave of austerity sweeping across Europe.

Governments from Madrid to Dublin to Berlin have announced draconian measures to rein in their yawning budget deficits and defuse the eurozone financial crisis, and the Chancellor will step up the pace of the coalition's assault on public spending today by detailing how the comprehensive spending review this autumn will deliver the most radical spending cuts since the Thatcher years.

The Chancellor, George Osborne, and the Liberal Democrat Chief Secretary to the Treasury, Danny Alexander, are expected to outline plans for a Cabinet "star chamber" that will oversee cuts of perhaps £60bn a year, almost one-tenth of current public spending plans.

Modelled on the Canadian experience in the 1990s, a process of consultation with the public and public-sector workers will also be launched. Such a "conversation" about how to re-prioritise public spending "fairly" was a key theme in the Liberal Democrat election campaign, and reiterated by Nick Clegg at the weekend.

Despite the attempt to carry public opinion with them, the scale of the challenge that ministers face means job losses are inevitable for at least 30,000 public-sector workers this year as a result of the £6.2bn in immediate cuts already announced. If they do follow the Canadian example, a reduction in the public-sector headcount of perhaps 1 million will be implemented over the planned five-year life of the Cameron-Clegg administration.

Although designed to impress the markets and preserve the UK's AAA credit rating, the Government's strategy carries its own risks – a severe knock to confidence at a delicate moment in the recovery, with the financial crisis in Europe threatening to disrupt plans even further, especially if the banks need more state aid. Simultaneous deflation across Europe and the wider world – entirely unco-ordinated by the EU or the G20 – also threatens to plunge the world into a double-dip recession.

Even with spending cuts on the scale envisaged, tax hikes seem unavoidable: many experts believe Mr Osborne's emergency Budget on 22 June will see a rise in VAT to 20 per cent, as well as rises in capital gains tax and reforms to tax credits.

What has been called a "cult of austerity" is now seeing millions of public-sector workers being sacked by governments from Madrid to Budapest. Prestige projects are being canned: a new airport for Lisbon is one casualty, the restoration of a Prussian palace in Berlin another. Some countries, such as Greece and France, are forcing state employees to postpone their retirements. VAT is up almost everywhere. Where they are able to keep their jobs, public-sector workers have been asked to take pay cuts of anything up to a fifth, with welfare payments to the middle classes and spending on transport and infrastructure also favourites for the axe.

Germany announced more swingeing cuts yesterday to "set an example" for heavily indebted eurozone states such as Greece, Spain and Portugal. Chancellor Angela Merkel will save €80bn by 2014 by reducing family tax credits, cutting 15,000 government jobs and delaying construction projects. There is also speculation that Berlin will raise VAT on food from 7 per cent to 19 per cent and abolish military conscription.

Such a scale of cuts is likely to be more than mirrored in Britain, which has a deficit more than twice as large as Germany's in relation to national income.

Mr Cameron stressed that unless further action is taken, the cost of servicing a national debt projected to hit £1.4 trillion could balloon to £70bn a year, or more than the schools budget. At £156bn last year, annual borrowing was due to be halved by 2014 under the Labour government's plans, now regarded as inadequate by the coalition.

Mr Cameron said that the cuts he will make will "affect every citizen" and the aftermath will "last for years". The £60bn of annual cuts that will probably be announced equate to about half the NHS budget, or defence and police spending combined.

Given that the NHS, overseas aid and defence have been "protected" by the Government, the most severe cuts are likely to hit areas such as transport and housing. The Business Secretary, Vince Cable, has warned of cuts to infrastructure that might jeopardise long-term growth.

The shadow Chancellor, Alistair Darling, rejected the Government's claims yesterday, saying: "Yes we have got to get our deficit down... but we have also got to make sure that we get growth in place, not just in here but in Europe, because if you don't get growth you will not get your borrowing, you will not get your debt down, and there is absolutely no sign that this Government grasps that."

How Canada did it

*There are two lessons from the Canadian experience – what they did, and how they did it.

The "what" was a budget deficit that had peaked at 9 per cent and was destabilising the Canadian economy. The Liberal government of Jean Chrétien was elected in 1993 and eliminated the deficit entirely in just three years. By 1999 the Canadian national debt had been slashed from almost 70 per cent of national income to below 30 per cent.

The Canadians showed that it could be done. They were helped by global growth – a sharp contrast with now – and a free trade agreement with the US, but the achievement was historic.

The "how" was by rejecting "across the board" panic cuts and planning their "programme review" meticulously. Crucially, the strategy sought to involve the public and public sector workers in decisions: An official report called it a "societal project".

There were no ringfenced areas: welfare, defence, transport and agriculture came off worst. Early retirement helped cut a fifth of the public workforce – a million jobs in UK terms. The approach was less "what to cut" and more "what to preserve". David Cameron will note that Mr Chrétien was re-elected in 1997.