Prime Minister David Cameron, who took office in May, says
shrinking the record peacetime deficit from 11 percent of GDP to almost nothing
within five years is the most urgent task for his Conservative-Liberal Democrat
coalition government.
A spending review is under way and results will be announced
on Oct. 20. Cameron has likened the process to “the methodical turnaround of a
failing business,” but there are many skeptics.
“Ministers are effectively flying blind, under orders to cut
programs by up to 40 percent but with confused guidance about their
departments’ objectives,” said a recent report from the Centre for Social
Justice (CSJ), a Conservative think tank.
Many fear that cuts will be made based on what is expedient
for politicians or least difficult for civil servants to deliver, to the
detriment of social and economic goals.
“At the moment there is not the sort of coordinated response
needed across departments to deliver the government’s economic objectives,”
Adrian Bailey, opposition legislator and chair of a parliamentary committee on
business, told the Financial Times.
Alastair Newton, political analyst at Nomura, said the test
would be whether the government scrapped low-priority programs to ensure proper
funding for high-priority ones, or whether it merely “salami-sliced” money from
many programs.
“I’m cautiously optimistic that we’re going to get some
sensible prioritization simply because the scale of the cuts is so big that you
cannot salami-slice your way through,” he said.
Newton said the coalition appeared to be looking seriously
for areas from which the public sector could pull back, but it would be hard
for centre-right Conservatives to agree on that with their junior, centre-left
Liberal Democrat partners.
“There is no such thing as the right solution here. There’s
what they can get away with,” he said.
There are no obvious templates for what the government wants
to do. The scale of the cuts dwarfs Britain’s two most recent austerity drives,
after a 1976 IMF bailout and in the 1980s, under the leadership of then Prime
Minister Margaret Thatcher.
There are also big differences with the much-admired Swedish
and Canadian efforts in the 1990s. Britain is launching into these cuts at a
time when growth in some of its key trading partners is weak and interest rates
are at record lows, leaving little leeway for rate cuts to support growth.
The government has ring-fenced health, a move popular with
voters which leaves one of the biggest items of public spending beyond the
reach of the cuts, exposing other areas even more.
“Speculation will continue to mount about whether that ring
fence can be maintained if it turns out to be politically challenging to make
deep cuts in other sensitive areas,” said Sam Hill, fixed income strategist at
Royal Bank of Canada.
Another concern is that cost-cutting in one area, such as
layoffs or early retirement for public sector workers, could lead to extra
spending in another, such as welfare bills.
Russell Jones, global head of fixed income strategy at
Westpac, said the Treasury appeared to be “playing hardball” to push ministries
to deliver wide-ranging cuts.
“This is not a subtle policy at the moment, it is a
sledgehammer. The danger is it hurts the economy’s flexibility and underlying
dynamism over the longer term,” he said.
The government is adamant that will not happen. Cameron has
said that “governing for the long term” was a guiding principle of the spending
review and tough decisions would be made.
“The truth is there will be some things that we genuinely
value that will have to go,” he said in a recent column.
But early initiatives to cut spending have given a flavor of
the difficulties ahead for the government.
In an embarrassing moment last week, Cameron’s office ruled
out a proposal to scrap free milk for schoolchildren, deemed too politically
toxic, at the very moment when a minister was busy defending the idea on live
national television.
