£6bn cuts – long-term pain for short-term gain?


Earlier this morning, The Chancellor and Chief Secretary to the Treasury detailed £6.243bn of cuts in public spending that will, in the most part, take place in this financial year. As promised, departments of health, international development and defence saw their budgets protected. In addition, schools funding, Sure Start children’s centres and 16-19 education were also spared the pain of budget reductions. As a consequence the axe fell harder on a number of other departments, including business (£836m), communities and local government (£780m) and education (£670m).

George-Osborne-David-LawsBoth men were at pains to point out that the majority of the savings would come from ‘reducing waste’, including over £1bn from less government advertising, use of consultants and travel allowances. The cancelling or renegotiation of contracts through more effective procurement is also due to save nearly £2bn, with £600m coming from a ‘bonfire of the quangos’.

However there are less politically salient casualties of the cuts. The abolition of the popular Child Trust Fund will save just over £300m, and the £120m generated by a freeze in civil service recruitment will hit graduate job-seekers particularly hard.

Credit must go to the Treasury team for delivering these savings in what appears to be a relatively equitable fashion across the public sector. Whether or not these cuts will help or hinder immediate economic recovery is anyone’s guess; however, it is clear that the motivation for today’s announcement is primarily to send a clear signal to international markets that this government is focused on reducing the deficit as quickly as possible, an objective that both parties now subscribe to despite pre-election disagreement.

This raises a very important question: to what extent do today’s cuts, and indeed the far deeper and more painful ones to come, reflect a view of how to rebalance Britain’s economy and find the future sources of economic growth, or alternatively simply represent a short-term approach to placating markets and particular political ideology? Given the significant cuts in the business budget, along with the squeeze in higher education spending with no apparent protection of science funding, it is not clear that these cuts are part of a broader economic plan for delivering the jobs of tomorrow.

Simply opposing government action on the deficit would be disingenuous and counter-productive. The focus for any responsible, strong opposition should be on ensuring that when cuts are deliberated or announced, their impact on the broader economy is carefully assessed. The challenge, but also the opportunity, for the Left is to develop and articulate an economic vision that is deliverable in today’s fiscal reality. On the limited evidence of today, the government is yet to decide on its own.

Editor’s update 15.28

Some other interesting takes on today’s news:

The ippr have put a strongly worded statement on the child tax fund. Co-Director Lisa Harker says:

“Scrapping the Child Trust Fund is a major backward step away from achieving greater equality in Britain. Campaigners have fought long and hard to establish the principle that the state should help families build up an asset to give all children a fair start as they enter their adult life. The spark provided by the Child Trust Fund has substantially increased parental saving since it was created in 2002 and meant children born since then will have a pot of money to help them get on in life when they reach 18. Now tomorrow’s generation are being asked to pay for the mistakes of today’s. We strongly urge the government to reconsider this step for the sake of building a fairer Britain.”

At Labour Uncut, Jonathan Todd argues that:

“In addition to decisions on growth, there are many decisions to be made on the best mix of reduced spending and increased taxation in deficit management. We should put more emphasis on taxation than the coalition, while being redistributive and imaginative, in terms of what we propose to tax. There are, for example, cases for revisiting land and carbon taxation, as Philippe Legrain has argued.”

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  • http://twitter.com/bulsonline/status/14619028550 Bham Labour Students

    RT @leftfootfwd: £6bn cuts – long-term pain for short-term gain? http://bit.ly/a0eqUH

  • Jonty Olliff-Cooper

    longer term question is about where we find good growth for the next 20 years, not just 2 years. nef has some interesting work, but poorly sold. http://www.neweconomics.org/

  • SadButMadLad

    Its worth remembering that the £6 billion is only 0.8% of overall government spending so only a minor prick and not a huge pain – for the whole country.

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  • Fat Bloke on Tour

    VC

    Sniffy is playing to the gallery with these cuts.
    Nothing to do with economics just a case of playing politics to show that he is a real dog boiler and is planning to do something about the deficit.

    The savings net out to £5.75bill, the effect on the deficit will be a lot less. The headline figure will mean less demand, less economic activity and less taxes paid to the Treasury.

    Looking at the longer term the real saving will be in the region of the £3-4bill needed to finance next years tax cut on employers NIC. Therefore he is cutting demand at a time of economic turbulence and anaemic growth to fund a tax cut one year in the future.

    The big issue here is that taxes need to go up to kick start the velocity of money in the economy. We are suffering from a lack of demand not high taxes at the moment. The NIC reduction will benefit the private sector surplus not demand in the economy. Tax and spend is probably a bit counter intuitive but it is the way forward especially if it is used in targeted investment for the future.

    Putting the savings figure into a historical context shows just how insignificant it is in terms of the deficit. Looking at the figures for 09/10 the Treasury got their forecast on the deficit £22bill wrong.
    In fact their performance on this has been close to shambolic over the past year, the more info they had the less accurate they got.

    They put it up by £3bill in November and now 6 months later it is £22bill lower, including a drop of £9bill in the space of one month. Some going and you have to ask if they were trying to stop AD getting more creative on the fiscal stimulus front?

    Consequently £5.75bill of savings is nothing but mood music in the face of a growing storm. The possibility of a double dip recession is the big issue in the real world, but in the upper middle class the new orthodoxy has the deficit as the big problem.

    Sniffy and his glove puppet are the public face of this orthodoxy and they both look positively entranced by the task of stopping the recovery and taking money from the poor.

    There is a lot of shroud waving at the moment as the establishment seek to re-cast public services so that they will have to pay less tax in the future. Things are not as bad on the deficit front as they are portrayed, the biggest issue at the moment as mentioned above is the double dip recession and taking £5.75bill taken out of government spending will do nothing to help in this area.

    The big question is what will Sniffy do if we do fall into a second recession?
    The cost to get us out will be a lot bigger than £5.75bill.

    The Thatch2 recession had the deficit peak at 8.7% of GDP after a difficult but in historical terms fairly mild downturn. The peak to trough GDP fall was in the region of 2%.

    The Credit Crunch has so far had the deficit peak at 11.1% of GDP after the worst recession in 70 years where the UK banking system has suffered a nervous breakdown and need unprecedented support to see it through and we had a peak to trough GDP fall of 6.2% .

    The left need to argue against the new dog boiling orthodoxy, not try and sandblast a few rough edges off it to make it more palatable. What we have we should hold not give it away to placate the great unwashed of the bond markets.

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  • Coplani

    Maggie tried to impose the Poll Tax in Scotland…Now for a suggestion to get us out of this fix we’re in…

    Why not impose an across the board 1% wealth tax on everyone, in one go…
    1% tax on the bottom 80% of the population will probably yield the same amount as 1% tax on the top 20%.
    So it would be considered a fairer method of reducing the debt….Simple really.

    Imagine a 1% wealth tax on all those wealthy people in the S.E…..
    I’m sure they wouldn’t mind, would they..!!!???
    After all, who has benefited most from the excesses of the last 20years…
    Now lets see… 1% of my wealth…how do I work out what my wealth is….Easiest method is to assume one’s wealth is tied up in property (and fixed assets)….So value of one’s property/ properties (minus any mortgage) would be a good starting point plus value of all shareholdings at current value plus any assets in a foreign country…
    Can anyone think of a fairer way to do this….Lets have some practical ideas please….
    We should be having a national discussion on this….Everyone I am sure would welcome the fairest way of reducing our debt….so come on get some ideas going…

    Why did Labour not consider a Wealth Tax???

  • Mr. Sensible

    I simply ask Cameron and Osborne, if these cuts are about cutting the defecit, how can they afford things like Free Schools, the Married Couples Allowance ETC?

  • SJ Chandos

    A coalition government of the ruling class, for the ruling class! The Tories are never happier than when cutting public expenditure. Their instincts have not changed since the 1930s, when their cuts deepened the effects of the depression. This is their first nature (Cameronian liberal-conservative leadership or not) and they are more than happy to return to it!

    These cuts, and those to come, are class warfare, no question about it. This government of the public school/oxbridge educated elite, will happily see the working-class, people on no or low incomes, the vulnerable and the elderly lose their vital services to protect the interests of capital. After all lets not lose sight of what caused this record deficit, the need to bale out the banks and city interests. Who are now the cheer leaders of the cuts, yes the city and the capitalists! They are more than happy to see us, the people, pay for their systemic crimes. It stinks!

    Can anyone any longer deny that Karl Marx was right in all essentials of his analysis!

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  • Lee the liberal

    A few of the comments here really show just how far we are from understanding what has gone wrong and how we can fix it. A lot of the people here really need to expand their reading list; we might not get so much malignant narcissism then.

    No, SJ Chandos, Marx wasn’t right. Next time you take a walk around a supermarket stop and consider how much is in front of you. We’ve moved from hunger, starvation and deprivation to prosperity, plenty and fat bellies in very little time. Capitalism has worked a treat.

    Coplani, slightly better point, but no matter how you tax, you’re still diverting productive real savings to unproductive, govnt waste. VAT, NI, Income tax – it doesn’t matter how you tax, just that you tax in the first place.

    Fat Bloke on Tour, nice piece on aggregate demand and the consumption function, all you need to do now is realise how wrong Lord Keynes was! Read Hayek and von Mises alongside your stuff and you’ll soon see the glaring holes in the macroeconomic case, just as I did. Start with von Mises’s short essay “the impossibility of calculation in the Socialist commonwealth” and go from there.

  • Fat Bloke on Tour

    Lee the Looney @ 1.03

    Away and bile yer heid ya muppet.
    LvM is a right wing mentalist’s mentalist.
    One club golf’er of the highest order.
    All that was missing was a grasp of reality.
    Libertarian tripe from start to finish.

    Consequently best of luck for your A levels.

    Either that or read up about quantifying public sector productivity.
    That is if you believe in the concept of a public sector.

  • Lee the liberal

    Fancy putting across a cerebral point, Fat Bloke, or are puerile insults the limits of your wit?

    And no, I don’t believe in the concept of a public sector.

  • SJ Chandos

    Lee the Liberal, walk around the supermarket and look at all the brands and then see here many products, even suposedly competing ones, are owned by the same multi-national corporations. Trying looking beyond the superficial and see what is beneath the surface of the apparent reality.

    Capitalism has inbuilt contradictions and inequality. Marx will always be right while the same system remains in place. Capitalism has evolved from a C19th to a monopoly C21th model, but its esential structure and principles remain the same. Exploitation and poverty is inherant, whilst power and wealth is increasingly concentrated in fewer and fewer hands.

    Capitalism works just fine if you are in the 2% of the population that constitues the ruling class. It is poison if you are in the rest of the population or, worst still, impoverished in a so-called’third world’ country. Tell the unemployed car worker in the west or a person, in India, Kenya or Brazil, living on the rubbish dump and working for a £1 a day that Capitalism works fine.

    Let qualify your statement, Capitalism works fine for the class in power and exploiting the rest of us!

  • Lee the liberal

    A very sincere note, Chandos, although it amazes me how people still try and plead Marx’s case.

    People are poor because humans are essentially born poor – it is our de facto state, it is where we started from. People are not made poor by anyone; it is simply our original state.

    Industrial civilisation has advanced by its own development – it has not taken anything from anyone, it advances on its own savings which inturn fund capital investment. More food is created, healthcare improves, people learn to read – this is a struggle of man getting away from his de facto, destitute state. All exchange is voluntary; our labour isn’t exploited, as Marx suggested, it is voluntarily exchanged.

    I made free not by a state, but by earning more and therefore having more control over my own destiny. Whatever big corps own, they cannot force me into giving up my wages for their products – only governments can do this.

    More people are absolved from poverty every day as a result of the market than have ever been helped by the state.

    Oh, and I’m not one of the lucky 2%, but I live a nice life. This is down to the market that employs me, feeds me more than I eat; gives me more books than I can read and more tosh to buy than I can conceive. What has the state ever done for me?

  • SJ Chandos

    Lee the Liberal, I could not disagree with you more, but you certainly appear sincere in your views, although I think them profoundly mistaken. Your point of view is pre-Marxian and completely avoids all discussion of the way in which capitalism developed out of feudalism and the defining mchanisms of capitalism, as clearly analysed by Marx. There is no mention of capital accumulation, labour value, exchange value and the profit motive.

    All people are not born poor, their position in relation to the means of production determines that! Certainly, children born to Baronets and attending Eton and Westminster public schools are not born poor. Whereas the sons or daughters of factory or casual workers are. That is social class and it remains the main determinant of the life chances and prospects of most people.

    The majority of people are forced to exchange their labour to secure the essentials of life (food, clothing and shelter) and purchase commerical commodities that falsely define us and our view of the world. Exchanges are not voluntary, they are essential to subsidence and are exploited by those that are in a position to do so. The capitalist will seek maximum profit and, in an effort to do so, will create conditions that reduce wages and conditions and even exploit far cheaper ‘third world’ labour. Hence multi-national corporations frequently moving operations to parts of the world where workers are on the most basic of subsistance wages.

    It is your position on the state and public services that I find most baffling. Post-1945 people like Keynes and Beveridge produced socio-economic theory that sought to address the structural failings of the free market. The 1945 Labour Government nationalised the commanding heights of the economy to stop it collapsing. And clever capitalists welcomed the greater intervention of the state that produced the wealth and social progress of the 1950s and 1960s. However, Capitalism cannot escape its contradictions long and the Thatcherite counter-revolution of the 1980s was predictable.

    However, what happens to the sick, the elderly and the vulnerable in this pure free-market Capitalist model that you appear to champion. Is the solution, as in he C19th, the foundling hospital, the workhouse, a short and nasty existence and death? As is common in the US, do we let people die, because they are too poor to insure themselves?

    I am glad that you are happy with your lot. Personally, I have greater ambitions for humanity. I want a system based on co-operation and the liberation of people in every sense. A system that eradicates exploitation of people and the earths resources and puts in place a more rational system. That system is Socialism.

    Liberals can hypostatize Capitalism as much as they like, but the present crisis reveals the inherent weaknesses of Capitalism and the need to ensure the transition to a better world. Marx was an analyst of C19th Capitalism, but he a theorist that will guide us in the C21st, when his vision will finally be realised.

  • Fat Bloke on Tour

    Lee the Looney @ 4.49

    “humans are essentially born poor”

    Tell that to Mr + Mrs Cameron, Mr + Mrs Clegg.
    Wealth goes to wealth, power to power.
    Those that have will want to keep.

    The more I read your analysis, the more I think you are a SWP wind up merchant out to cause ructions on a mainstream left wing blog.

    If you really believe the stuff above then all the best with your exams …

    You must be cramming for your 11+.
    At least it made me laugh rather than cry.

  • Lee the liberal

    Some interesting points, Chandos, but you still seem to miss mine.

    A primitive man who fished with his hands had an idea once, an idea that would allow him to greatly expand the number of fish he caught. The desire to expand his produce and allow him to improve his modest lot was as natural to him as breathing and eating. We call this desire to improve our lot in life the “profit motive”.

    To bring this idea into practice, he needed to take time out of his usual fishing tasks to allow him the time to build the new tool. However, he was only catching just enough fish to survive as it was – nature hasn’t ever been very kind to men – so the only way he could take time of out his usual fishing was to save some of the fish he caught the normal way. He put them in a little pond near his hut.

    After a few weeks he had enough fish to allow him to take an entire week out of his usual fishing tasks. The fish are what we call “savings” and the activities to improve our lot it provides for are called “investments”. Investments cannot take place without savings. Improvements in material conditions therefore cannot occur without savings.

    During this week off, our man successfully completed his new tool – he named it “fishing net”. This bizarre new contraption allowed the man to catch five times as many fish as the old way. The man was now far more prosperous as before, and all he needed was the will and determination to do it. He didn’t need Ed Balls to ransack the local pygmy village under some pompous pretension of “equality” to improve his lot.

    The man now had more fish than he needed. Rather than let them go to waste he had two options: firstly, he could take some fish to the local market and exchange them for something else; secondly, he could simply spend much less time fishing and more time admiring the ocean. Which would you choose, Chandos?

    Here is where “value” comes into play. There is no right or wrong answer to the question above. Some people would prefer to exchange the fish for something else, others would prefer to chill out and take in the view. This is because all people are different, and therefore have entirely different value scales — value is subjective, *all* value is subjective.

    When our man arrived at the market, he met a clothes maker. He’d always fancied a nice, white Armani shirt, so he exchanged some of his fish for the shirt. The clothes maker had many shirts and valued some fish more than a single shirt; our fisherman valued the shirt more than the fish. There was therefore a trade: a mutually beneficial, purely co-operative act. This is the market- this is *all* the market is.

    While in the market, another man approached our fisherman. This man was a businessman who ran a food company and asked the fisherman why he had so many spare fish to sell at the market. Our fisherman went on to explain his new invention and the business was delighted – “I employ a group of people who fish by hand, do you fancy a job at my firm”. The fisherman clearly would only accept employment if the terms offered were superior to those on offer. The businessman would clearly have to compete for his labour by offering higher returns.

    The two men bartered for a while before another trade was agreed. This time, the fisherman would exchange 35hours of his employment for £x per week: a mutually beneficial, purely co-operative act.

    Capital accumulation, value, profit motive as well as some other pointers you were lacking, Chandros. The only thing I refuse to provide is a definition of “labour value” as it is no different from any other value. The term was introduced by Adam Smith in error – subjectivism only made its way forward toward the end of the 19th century. Marx was simply building upon an error of the classical school many years before, sort of like in maths when you get a wrong answer because of earlier calculations.

    A “capitalist” or employer will, of course, seek to maximise profit and reduce labour rates. Just like the employee will seek to maximise profit and increase his labour rates. The final wage will be based on the market clearing prices on both subjective value chains – read up on Marginal Utility for more.

    You keep referring to monopoly, but the only viable definition of monopoly is a grant of privilege from the government. Quite how you correlate that having more government will reduce monopoly and privilege is a case of simple incoherent reasoning

    Of course Cameron and Clegg etc etc are rich. Who cares? Surely if our true concern is the poor, we should be focussing on ways to make the poor richer, not the other way around. This is done, as explained above, through savings, investment, hard work and an economy that isn’t blighted by exogenous, parasitic factors, such as Socialist governments.

    Keynes, Beveridge and Atlee didn’t address structural failings in the market economy – there wasn’t any there. Two state-led world wars destroyed breathtaking amounts of resources, not your straw-man capitalist. The abolition of the gold-standard allowed massive amounts of money to be printed, further destroying resources.

    The sick and elderly will get help the way they have always done, even during the welfare years: they will save during the good years, pay for their stuff and receive benevolent help if things get too bad. People got by just fine prior to 45, and they have got by fine since in light of the institutional incompetence of government departments.

    Most importantly, I’ve addressed your penultimate paragraph. I too want a system of co-operation and liberation. The only difference between you and I is that I’ve read around the subject, thought it through and sought a cogent vision. All you’ve done is read Das Kapital.

    And Fat Bloke, I’m still waiting on a good point. I never had the opportunity to do the 11+ as some left-wing spiv thought it a good idea that I not learn the rules to cricket. Instead I had to make do with statistically the 3rd worst school in the country.

    I was one of the lucky ones, though. I managed to shirk left-wing ideology and now I’m paid for my economic analysis in a FTSE firm.. and make good money shorting the banks. If you ask nicely I might even give you a few tips. Poor boy made good – and not a socialist in sight.

  • SJ Chandos

    Lee the Liberal, thank you for taking the time to provide me with such an extensive response. I genuinely appreciate it. Constructive debate is difficult because we are coming from completely opposite ends of the politica spectrum, so there is little common ground.

    My position is based upon an historical materialist analysis of capitalism. Your’s appears abstract and ahistorical, lnked to the world view of the class that you serve. There is nothing wrong with that, as I also defend the interests of my class. Das Kapital is, indeed a key work, but I have also read the likes of Keynes, Hayek and Friedman. I think that you assume too much in stating that I have not read them; the difference, however, is I have rejected them in favour of a vastly superior Marxian analysis. In contrast, can you genuinely state that you have read, analysed and critiqued Das Kapital Vols 1-3 or, like most right-wingers are you basing your views on flawed, second hand accounts of Marx? From your response, I suspect that the latter is probably the case.

    In your account we go from a bartering system of economic exchange to one where a company exists. Did comnpanies exist when people bartered, I think we both know the answer to that one. Totally, ahistorical and not related any economic system that ever existed, outside of your imagination.

    What about the transition to feudalism? Did the Serf enter in to a fair negotiation with his Lord and negotiate the best deal for himself? What great exchange resulted in him agreeing to servitude and total submission to his lord and master. With the advent of industrial Capitalism, what great deal made displaced rural people uproot and work in hellish factories for 15 hour days for subsistence wages? Did children also enter in to this negotiation and get a great deal for themselves in the said factories? Was there no class based power and exploitation governing any of these economic relationships. Totally ahistoric, in truth, a fiction!

    The Second World War was a product of the Capitalist cyclical crisis of the 1930s, which led to the emergence of the Fascist regimes. The war econmy lifted the recession and resulted in the extension of the state. However, the failings of the free-market in the 1930s meant that the system needed to be supported post-1945. Free-market anarchy was the cause of hardship, inhumanity and war and state provision and Keynesian economics was the proscribed antedote for a period. In Gramscian terms, the Capitalist system in this period underwent a ‘passive revolution’ that was successful for a period. But Capitalism can never be separated from class interest and its structural contradictions. Hence, the Thatcherite counter-revolution and the class warefare in the 1980s and 1990s.

    Your statement about the position of the elderly, sick and vulnerable under the free-market is amazing. Do you understand how people suffered before 1945 and the emergence of the welfare state? Do you understand the fear that people lived in of illness, disability or unemployment? Do you realise how many people died for the want of decent housing, public health and medical attention? Do you unerstand the fear and loathing of the work house and the indignity of charity?Do you realise the absurdity and humiliation of the poor laws and local Councils requiring the unemployed to smash rocks in return for a pittance? Thank god for the political courage of the Poplar Councillors in standing up to that nonsense in the 1920s.

    It appears that you only read works that supports your world view, and that is unfortunate. Finally, your final paragraph, responding to another post, reveals all I need to know about your class affiliations and whose material interests you champion.

    Regardless, thank you for an interesting exchange of views and engaging in a reasonable and respectful manner. I have been forthright, but hopefully you will agree that I have conducted myself in a way that is respectful of you, even if I cannot accept your world view or its inevitable implications for my class.

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