Osborne’s Tough Medicine

Cardiff Business News

Public sector workers, business leaders and members of the public had been waiting with bated breath for the Chancellor of the Exchequer, Mr George Osborne, to pronounce a series of spending cuts across the public sector today.

And at 12:30pm, an unflinching Mr Osborne presented the Comprehensive Spending Review (CSR) to the house of Commons, announcing his tough medicine to treat Britain’s chronic budget deficit.

The Chancellor said: “It is time to draw the country back from the brink of bankruptcy.”

But before laying out the specifics of where his axe would fall, Mr Osborne attempted to justify the cuts.

In a nutshell, the budget deficit – the amount of money the UK government is falling short of its annual expenditure forcing it to borrow to make up the difference – currently stands at £109bn. This is the highest of any European country, and today the Chancellor called upon the name of the IMF to back up his assessment of the UK economy.

But  Mr Osborne revealed a worrying statistic that the government currently spends £44bn a year on paying interest on net government debt (the total amount of money the British government owes to the private sector and other purchasers of UK gilts), calculated in October 2010 at £952.8bn.

Currently government debt is 64.6% of GDP. The HM treasury has published some slides to illustrate the acuteness of the debt problem. (See slide 3)

Following years of perusing a policy of Keynesian economics (spending ones way out of a recession), championed by Gordon Brown, the government has now decided to tackle the deficit with spending cuts in a move towards fiscal consolidation.

The government’s pot for capital spending, which deals with annual spending budgets, will be reduced from £51 in 2011 to £47bn by 2014.

These cuts will see  local government shrink by 27%, the environment by 29% and 23% from the Home Office. The Department of Media, Culture and Sport is to be reduced by 24% while the Ministry of Justice will see their budgets cut by 6% a year.

Apart from capital spending welfare will be cut by £7bn, while the state pension age will rise to 66 by 2020, saving up to £5bn by brining the date of implementation forward by six years. But even before today’s review, around £28bn of cuts were announced in the emergency budget in June.

The most alarming figure is that 490,000 jobs will go over the next four years, although Mr Osbourne argued this will be implemented gradually through natural turnover, that is, not replacing retired employees in the workplace.

In total, Mr Osborne’s tough medicine is to cut £81bn over the next four years.

But in reaction to the CSR, there are fears that the cuts are too deep, and rather than curing a disease of debt, efficiency savings will actually increase unemployment while cuts in certain areas could put national security at risk.

Shadow Home Secretary, Ed Balls said:

“They go way beyond what can be achieved through efficiency savings and better procurement. Cuts to the funding of border controls and counter-terrorism policing risk weakening our defences against threats to our national security. The Home Secretary has abjectly failed to fight the corner of the police in these Spending Review negotiations.”

And in Wales, where I will be investigating the effects of the cuts in the next few weeks, BBC Wales correspondent Nick Severini said:

“It’s often said that Wales has a public sector culture. Not only does it employ 27% of the workforce, but the spending power of those workers and contracts with the public sector are essential for so many companies in the private sector. These range from large construction firms, which rely on contracts for half of their work, to small firms like the appropriately named Kutz N Kurlz hair salon in Brynmawr in the south Wales valleys, where a third of all the customers are directly employed by the public sector. That’s why organisations like the Federation of Small Businesses in Wales are deeply concerned about the threat of a double dip recession.”

So although many of these figures from today’s review may seem removed from the present, many people in Cardiff will be affected by the cuts. This blog seeks to trace the effects of the CSR on the public sector and will look at how the private sector reacts to create new jobs, as policy makers hope it will. And there is no doubt that protests will follow; the first large protest has already been organised for 12pm this Saturday.


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