Low-paid jobs at the root of Osborne’s failure to bring down the deficit
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Version 0 of 1. George Osborne’s failure to bring down the deficit as he first predicted poses a problem for the Tories: the figures show that Alistair Darling could have done as well or even better with much less austerity. Back in 2010, Labour’s chancellor forecast that annual government borrowing would fall to 4.5% of GDP by next April. Osborne took office promising a steeper fall, to 4%, but he is off track to the extent that official predictions estimate the gap between tax receipts and public spending will instead be 5.5% of GDP by the end of the financial year. To cover the shortfall he will be borrowing more than on Darling’s plan. Just as the Tories are trying to cement a position in the public’s mind as the guardian of the nation’s finances, the lack of tax receipts since spring this year, coupled with higher spending on in-work benefits, mean the deficit could be even higher when the final shortfall for 2014-15 is calculated next April, just before the election. The question is whether Labour would have suffered in the same way from the buffeting winds of the eurozone crisis and high oil prices that knocked the economy off course. Would Darling’s austerity-lite package – which envisaged spending around £200bn more than the Tories over four years to fund higher welfare and Whitehall spending – have protected Britain against the eurozone crisis that has brought the continent to the brink of stagnation. Keynesian economists are convinced that the huge contraction in private sector activity after the financial crash needed to be met not just with an emergency package, but a more prolonged injection of state funding. They argue that the coalition was derelict in its duty when it refused to respond to the collapse in lending by banks and the lost investment by private sector firms by investing money to instil a sense of confidence and trigger a quick recovery. Yet this was considered by neither the cautious Darling, nor the more determined Osborne, who saw virtue in taking the opportunity to cut what he saw as excess fat in public service provision. Both chancellors placed their bets on a return of private investment within only a couple of years of the 2009 recession, spurring growth without the need for an increase in public investment. In fact, public investment was scheduled to fall almost as far and as quickly under Labour as it was under the coalition. Public sector net investment as a proportion of GDP was 3.6% in 2009. Under Labour plans it was scheduled to shrink in the following year to 2.7% and then to 1.3% in 2013-14. Osborne’s first cut was harsher, taking the proportion of spending to 2.6% of GDP before making slower progress towards 1.3% in 2014-15. That bet on the private sector coming up with the necessary investment was backed by the government’s economic watchdog, the Office for Budget Responsibility, which in its first stab at forecasting for the 2010 budget said private sector investment would rebound by 8% within a year. In the event, it failed to achieve that level of growth until two years later. Without strong business investment, the economy was reliant on consumer spending to boost activity. This consumer activity has largely been driven by the housing market and a demand for services from hairdressing to hotels and restaurants. The problem for Osborne is that these services are provided largely by low-paid workers who contribute little tax. A drift to self-employment has also undermined the public finances, as young entrepreneurs and older workers, many continuing beyond retirement age, offset their expenses against tax to minimise the slice taken by HM Revenue & Customs. More than two-fifths of the jobs created since the coalition came to power have been self-employed and many of the remainder are part-time, leaving only a fraction of new full-time roles paid comfortably more than the £10,000 personal tax allowance. Will the next five years be worse or better? There is a school of thought that a further five years of austerity, however it is packaged, at a time when interest rates are likely to begin increasing, is a recipe for social unrest. Public spending cuts will be more difficult to make and higher mortgage rates will cancel out an increase in wages. Osborne is expected to promise large cuts in public spending of more than 5% of GDP between 2014-15 and 2018-19. The aim is to achieve a balanced budget. Yet if the tax take continues to fall short, the cuts may need to last beyond the next parliament – that is, unless taxes go up. |