Reaction to Britain’s public spending squeeze might force strategy change

THE pain of Britain’s forthcoming spending squeeze — the most sustained of its kind since WWII — may yet force the government to rethink its strategy, the head of the Institute for Fiscal Studies told Reuters.

Carl Emmerson, acting director of the independent think-tank, said that while the impact of tax rises and welfare cuts was relatively easy to quantify, the impact of public service cuts — and the public’s reaction to them — was much less certain.

“The government is taking such big sums out of public spending there has to be a risk that one or two years down the line it decides the pain is too great and a plan B, or even a plan C is needed,” Emmerson said.

“You can say, for example, that you’re going to take 75% out of the housing budget, but what does that really look like in practice?”

Britain’s coalition government, in power since May, has announced an ambitious austerity drive in the hope of slashing the deficit, currently more than 10% of GDP, to next to nothing over the next five years. Its programme, which includes heavy cuts to welfare, higher education, social housing and local services, represents the most sustained squeeze to overall government spending since World War Two and the deepest cuts to public services provision since the 1970s, according to the IFS.

The bulk of the government’s spending cuts and tax rises do not kick in until next year, but already there are signs that consumer confidence, bank lending and house prices are weakening.

The government has repeatedly denied it needs a contingency plan should the cuts tip the economy back into recession, but Emmerson cautioned the public finances could be hard to tame, particularly when the economic outlook was so uncertain.

“You can be fairly sure that tax rises will deliver, but it is far more difficult to quantify the impact of public spending cuts and the reduction in the quality of public services,” he said.

The example of Ireland — which has required international assistance two years into its own austerity drive — shows how growth can suffer from slash-and-burn budgets. But Emmerson said Britain had benefited from a currency flexibility denied its neighbour and was “not in the same place”.

“The fall in the pound has certainly been beneficial to the recovery,” he said.

“Ireland has fewer instruments and is dealing with a much larger problem.”

The IFS calculates around 73% of Britain’s planned fiscal squeeze will be borne by spending cuts, with the remaining 27% coming from tax increases. Emmerson said this breakdown looked ambitious, bearing in mind the split during Britain’s last fiscal squeeze of the early 1990s was 50:50. But he noted government borrowing this year was evolving in line with the Office for Budget Responsibility’s forecasts and welcomed the government’s commitment to greater transparency with regard to macro forecasting.

“The trend shows they are in the right ball park,” he said.

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