A squeeze this tight risks asphyxiation

At the Budget all the debt chickens came home to roost in a large and ugly flock, darkening the skies above Westminster before settling in a screeching, squabbling mass on the Treasury. These birds, George Osborne told us, are now set to feast on Whitehall’s budgets.

The coalition presents these debts as the result of both Labour’s profligacy, and a credit crisis rooted in poor governance. That is certainly half of the story: this year’s structural deficit is 4.8 per cent of GDP – almost half of the current 10.1 per cent overall public finances deficit – and even supporters of the Financial Services Authority accept that it couldn’t keep up with the finance sector’s calamitous ingenuity.

However, the tale also has another half. The credit crunch was a global phenomenon, gestated within a financial sector defended against heavier regulation or taxation by figures as disparate as Ken Livingstone and Boris Johnson. Much of the public debt was incurred both in propping up the financial institutions whose ignorance and foolishness caused this crisis (they bought debts whose profitability depended on a continuing property boom, blended so that their origins were hidden: I don’t think these words are too strong), and in coping with the impact of the resulting recession on public expenditure and tax revenues. 

There’s another chunk of debt, too: the money injected into the economy in a rather successful attempt to ameliorate and minimise the recession. Don’t forget: government spending – both on the stimulus, and on schemes to help businesses and homeowners facing debt problems – helped keep unemployment and repossessions well below expected levels. So while stupid political decisions – made by Labour figures keen to expand our financial services industry – certainly helped to lay the groundwork for this recession, the government reacted to the crisis by first preventing a banking collapse, and then minimising the scale of the inevitable recession. Some commentators have, incredibly, interpreted the story of the credit crunch as one of government failure – but the public sector is actually the hero of this sorry tale.

These chickens, then, represent not just the fowl bred by ministers living beyond their means, but also the harpies raised by bankers who bought without looking, and the mangy chicks adopted by over-leveraged companies and individuals. With Osborne set on minimising tax hikes, the government will adopt three-quarters of them. But this burden brings two huge risks.

First, taking this much money out of the economy, this quickly, risks pushing us straight back into recession as public jobs and procurement nose-dive. When deficit hawks point to the successful examples of Canada and Sweden, they fail to add that the coalition’s cuts are both much more severe, and implemented within a far more depressed global economy. The government’s plans for paying down our public debt assume growth of 2-3 per cent from 2011, and thus rising tax revenues; if this shock therapy drops us back into recession, we could find that we have both massive public debts and economic decline. Obviously, the government’s plans do need to be ambitious enough to reassure the bond markets – but a return to recession is more likely to spook those markets than a slightly slower move into budget surplus. 

Second, austerity on such a scale risks wrecking many of the government’s other policies. The coalition has pledged to protect both the NHS – scene of the greatest discretionary spending rises and thus, some suspect, the greatest inefficiencies – and international development from the squeeze; it will also go easy on defence and education. The picture for the other departments looks horrendous.

This government contains ministers who have argued for a more environmentally-sustainable economy – but DECC and Defra will not have the funds to help foster that change. Work and pensions minister Iain Duncan Smith has a detailed plan to reform the benefits system, get people into work and reduce DWP spending – but his ideas rest on the ability to first invest in spiking the benefits trap. The Conservatives’ ‘big society’ envisages rapid growth in voluntary organisations and social enterprises – but local authorities and the CLG, whose funds and staff support the sector, are set to undergo a council tax freeze and massive central funding cuts. Perhaps most importantly, the UK’s economic future rests with high-technology industries, fast transport and communications, and a skilled workforce – but the DfT and BIS look vulnerable in this spending review.

Perhaps the coalition really can realise its policy objectives while imposing these cuts; perhaps the reduction in government activity really will allow the private and voluntary sectors to step in and fill the gap. But in the story that began here with the run on Northern Rock in September 2007, the problems have consistently arisen within the private sector, and been addressed by public sector action. Putting aside this safety net, the coalition is stepping into territory where no government has ventured before. We had all – public, private and voluntary sectors alike – better hope that they’ve made the right call.