Leading article: Cutting now remains a risk to the recovery

Friday 14 May 2010 00:00 BST

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Louise Thomas

Louise Thomas


The £3m the taxpayer will save from the voluntary 5 per cent cut in ministerial salaries is a fine example of the sort of efficiency savings virtually everyone would like to see spring up across the public sector. The efforts of those serving in the Government will not, we can safely assume, be badly compromised by this loss of financial incentive. Perhaps they should have balanced their salary cut with a longer-term scheme for performance-related pay, dependent on the savings in the public purse they make – without cutting the standards of provision.

Sadly, such rewards may be scant. The reality, as the Conservatives recognised in opposition – when they were attacking their opponents' "efficiency savings" – is that cutting down on waste is the oldest trick in the book for a politician in a corner. In reality, the pain will be much greater than that suffered by new ministers on 95 per cent of a pretty acceptable remuneration package (Jaguar as standard for the lucky ones).

The £6bn in cuts that seem inevitable in George Osborne's emergency Budget next month will probably lead to the loss of between 30,000 and 60,000 public sector jobs, according to the National Institute of Economic and Social Research (NIESR). And, just as Vince Cable warned before he was signed up to the coalition project, it will knock back recovery. The NIESR puts the impact at between 0.1 and 0.2 per cent of GDP – which doesn't sound much until you put it in the context of an economy growing by just 1 per cent over 2010. The crisis in the eurozone – our largest export market by far – could shrink that still further. A rise in VAT to 19 or 20 per cent will also do little to support the economy. (It may be pre-announced for next year to bring consumer spending forward, but will still be a dampener). Half a million public jobs will go over the next five years.

The upshot is that Mr Cable and Nick Clegg will find themselves implementing an economic policy that they predicted would be a disaster just weeks ago. Now they must both hope that they were wrong and that David Cameron and Mr Osborne were right.

Then again, even that £6bn of cuts pales when the true, and as yet undisclosed, extent of spending cuts will be laid bare in the autumn. The comprehensive spending review will, at last, reveal where the cuts will be implemented. The "black hole" in the coalition's finances may prove even larger than the £52.5bn in undisclosed cuts the Tories advocated during the election. That's because, despite the stirring rhetoric about restoring the public finances, the coalition's policy statement suggests that they are keener to accommodate each others' tax cuts than they are to take on the unpalatable task of slashing public spending and public services.

The task of taming the deficit – as Labour and Liberal Democrats argued until the new government was formed – is less one of scale than one of timing. Cutting now is a risk to recovery. Mervyn King, Governor of the Bank of England, stressed the risks again this week, even as he praised the new government's plans. At a time when so many nations around the world are also cutting public spending and reducing borrowing – Greece is only the most spectacular case of a global trend – it is worth asking too what happens if everyone deflates at once. This is not the sort of phased considered support to the international recovery envisaged in successive G20 communiqués.

Instead the world seems set to slip into a downward spiral of competitive deflation. It is a classic paradox; what is sound policy for Ireland, or Greece, or even Britain, becomes insane when repeated on a world scale. Deflation, let it be remembered, often makes public deficits worse, at least in the short term, by choking growth employment confidence – and tax revenues. Days into its existence, this government is already displaying signs of a split personality.

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