Yesterday George Osborne set out an undoubtedly bold Budget aimed at seizing control of the public finances in order to bring down the debt and restore economic growth. This Budget was, he argued both "unavoidable" and "fair" – but was it?
First, the Conservatives had hailed this as an "Emergency Budget". Whilst it’s true that all new Governments set out their economic trajectory and for this Government, given the state of the public finances, there was a greater need to do this than for most, this was no ‘emergency’. Britain is not Greece. The markets were anticipating the Conservative Budget but were not teetering on the brink. Our economy is more broadly based. The green shoots of recovery, if tentative, had begun to appear.
Second, was the Budget "unavoidable"? Commentators agree that something had to be done. Britain’s public finances need to be dug out of the hole they’re in. Spending at 47% of output and borrowing 10% is unsustainable. And yesterday’s plan to restore the public finances was unarguably ambitious. Whereas Labour had set out to tighten the public finances by £73bn over five years, the Government plans an eye-watering reduction of £113bn. This will mean departmental spending cuts of 25% by 2014. If you thought the Thatcher years were bad – you ain’t seen nothing yet. Not even Thatcher went as far as reducing departmental allocations in real terms.
But is this bold move economic logic and really "unavoidable" or a significant stamp of ideology? Economists including Will Hutton, Paul Krugman and others argue that such severity was both unnecessary and risks choking off recovery. Why take the gamble? The Conservatives should be clear that it’s not so much a case of economic necessity as ideology – the first steps towards the big society and state retrenchment – which underpinned the changes yesterday.
Third, was the Budget fair? Even Labour had recognised that recovery was always going to be painful and to improve public finances taxes had to rise and public services have to give. And there were laudable cuts yesterday, (some) measures to tax the banks (though nothing on bonuses), alongside support for those on lower incomes such as lifting those on the lowest incomes out of tax altogether.
But, the Budget is highly likely to hit the poorest most. VAT will be increased to 20% and is a regressive tax paid hitting those on lower incomes most. Benefits will be year on year reduced through their new indexation. Above all the pain of the spending cuts to be detailed in the autumn will hurt those on lower incomes, who are reliant on social and local services, the most. Whether the Budget was fair or not may depend on your definition of fair but it’s clear that for many of the poorest in society the worst is yet to come.