David Cameron and Recep Tayyip Erdogan (Photo credit: The Prime Minister’s Office)
Britain is now counting the days until the Coalition Government delivers its fourth Budget. There is every indication that Chancellor, despite paying a high political price for losing the Government’s cherished AAA credit rating, will opt for “Plan A+”, “Plan B”, “Plan C (Cable)” or any other change in fiscal strategy. This time observers expect even harsher cuts to be made than originally planned, due to poor economic performance causing the budget deficit to remain at 2011 levels.
After the controversy surrounding certain measures in last year’s budget, which triggered complaints about a “Pasty Tax” (the imposition of VAT on hot foods sold in bakeries) and a “Granny Tax” (cuts in pensioners’ tax allowances), many in the Conservative Party are calling for greater spending cuts instead of tax rises. However, there is evidence of growing opposition from Cabinet ministers to further reductions in the spending of their respective departments, with Defence Secretary Phillip Hammond urging the Chancellor to squeeze benefit claimants instead. This prompted David Cameron, aware that the Liberal Democrats are unlikely to support this, to warn ministers of the need to avoid “cuts nimbyism”.
Such open internal division would have been unheard of in the early days of this Parliament, and some are speculating if the strains both between and within the Coalition parties are become so severe that a coherent economic policy might not be maintained until 2015. Note the very real contrast between Lib Dem Business Secretary Vince Cable‘s recent comments about the need for increased public works investment and David Cameron’s repeated insistence that “there is no alternative” (a phrase popularised by Margaret Thatcher) to the destructive and self-defeating course of cuts and slowed growth.
Some measures announced last year will also come into effect with this Budget. The reduction in the top Income Tax band, the changes to Council Tax Benefit and some other welfare reforms will compound the inevitable political fallout from this year’s measures. But it isn’t just a matter of political issues- the direct effect of these changes is a direct shrinkage in the extent to which the state redistributes wealth from the rich (with the 50p tax band) to the poor (Council Tax Benefit). This means a greater portion of the national wealth will be in the hands of the affluent, those who are likely to invest it in unproductive assets such as shares and housing, and lower income groups, who spend all their income on goods and services in the present, will have less money with which to do so. With the economy on the verge of a triple-dip recession, reducing consumer demand is guaranteed to contribute to any other financial problems.
If , as looks likely, our political leaders fail to respond to the evidence that “austerity isn’t working” in a couple of weeks time, we will pass the last real opportunity we have to revert to a strategy of stimulus and investment. In 2014, all eyes will be in the upcoming General Election, and Osborne would fatally undermine his remaining support base if he does a U-turn 80% of the way through his term in Office. He would be held responsible for all the damage his spending cuts have caused, and would not reap the benefits of the long-overdue recovery before the nation gives its verdict.
Later this month, we will probably watch George Osborne resolve to push on with further regressive spending cuts. He will condemn Britain to a third recession and at least two years of further stagnation. This is a prediction that will come true. The real question that should be asked is: is Osborne genuinely blind to economic reality, or his he putting his political survival ahead of the national interest?